Advising The Client
Consider the investment path of a hypothetical client named “Elaine” as she pursues higher and lower priorities over her lifetime. The chart shows how her priorities might change over time and with that, the appropriate components of her investment portfolio.
In the early stages of her career, Elaine expects high and stable earnings with few obligations, so she can afford to take higher risk in an all-equity portfolio. But before long, she may marry (or not) and have children (or not) and have the increased burdens of family life while planning for her children’s education. Her higher priority objectives increase, and Elaine moves more toward the related low-risk investments. Eventually, her nest becomes empty and retirement approaches. Her career reaches its apex, and resources accumulate at a faster pace. Elaine can soon enjoy a life of well-earned leisure and engage in community service with a “conventionally” balanced portfolio to maintain her lifestyle, benefit family and charity but protect against any severe medical expense.
There are no clear lines of demarcation in such a path, and her advisor’s proposed changes for Elaine’s specific investment choices over time are likely to be gradual. However, the chart gives a sense of the life cycle path for Elaine’s high versus low priority objectives, and the sort of portfolio components—we say components rather than “mix”—to meet them.
This path of priorities over time is a key difference in the investment choices of individuals as opposed to institutions. As clients age, their time frames change. And with that, objectives that were once uncertain move into closer focus. Putting these dimensions into practical portfolio choices helps the client understand the rationale of the resulting portfolio, engage with the advisor on specifics, and have confidence in the process and the likelihood of results. Instead of feeling like the object of a “black box” exercise operating in abstractions like “risk tolerance,” the client will be the beneficiary of a collaborative process in constructing and maintaining the appropriate investment portfolio over time with the ongoing guidance of a skillful and dedicated advisor.
Rick Bookstaber, Ph.D., is co-founder and head of risk at Fabric. He previously held chief risk officer roles at Morgan Stanley, Salomon Brothers, Bridgewater Associates and the University of California Regents, and he served at the U.S. Treasury in the aftermath of the 2008 crisis. He is the author of The End of Theory (Princeton, 2017) and A Demon of Our Own Design.
Tim Kochis, JD, MBA, CFP, is advisor to and an investor in Fabric. He is co-founder and former chair and CEO of Aspiriant. He previously led personal financial planning at Deloitte & Touche and Bank of America. Kochis chaired the CFP Board, the Foundation for Financial Planning, and the Financial Planning Standards Board. He co-founded the Personal Financial Planning program at UC Berkeley and has written several books, including Managing Concentrated Stock Wealth (2d Ed. Bloomberg, 2016).