Where Software Often Fails
These are not things that boil down to inputs that easily fit financial planning software. The risks we face in life might have financial implications embedded within them, but to look at them only through a financial lens often means missing life’s richness, as well as the richness of the objectives. For example, that new job overseas may not be really about the money. The emotional impact of the kids leaving the nest may be what’s really most significant.
In many cases these life experiences can’t be planned for in advance, much less thought of within the initial financial plan. Sometimes, they are surprises that come out of nowhere. So they need to be integrated into the financial advisor’s rich, ongoing discussions. These discussions not only benefit the client but enhance the advisor’s own career fulfillment. The learning never stops; the professional gratification of providing sound advice has no limit.
Just as risk is at the core of life experiences that are never entirely financial, so the advisory/client communication must not shy away from identifying the elements of risk that those experiences present.
Speaking the same language about risk. When risk is at the core of communication, the advisor and the client come to look at it and speak about it the same way. They can communicate about how risk is higher or lower, what might lead risks to change, what is the right risk tolerance for the client given the risk capacity, and how that might change. That communication won’t be put only into numbers, but also (more importantly) into narratives. Those narratives will involve the way a variety of risks become part of the clients’ optimal choices throughout their lives. And to bring in the financial element, that language must be rich enough to also express the complex dynamics of the investment markets, taxes, inflation and other financial policies. The language about risk must have a broad and deep vocabulary.
Understanding the client’s purpose for taking risk. When advisor and client share a common risk language, they are more likely to understand the achievability of client goals and agree on the available and appropriate path. The advisor knows there will be bumps in the road that will matter to the client. And there will be others that won’t be significant and can be largely ignored. The risk conversation is a narrative describing these twists and turns, the ups and downs along the way.
Integrating the client’s values that are encompassed by risk. When advisors understand the clients’ reasons for taking risk, they are more likely to see eye to eye on what values are important to the clients and view risk in that dimension. The client might want to pursue environmental, social or even political issues. They might desire respect within their communities. They might want to protect their family from financial hardship over future generations. There are no limits to the range of client motivations, but each of them could pose a different set of risk criteria.
‘Risk Culture’
Purpose and values, and the language used to express them, are the elements of culture. So when we combine these elements in the advisor-client relationship, we should have a culture of risk assessment and management—a common framework that adds depth to the relationship, makes it genuinely human, not mechanical, and puts risk in the forefront rather than merely inside a box to check off or a number to report.
Risk is part of life, not something separate from it and, in no small part, it’s a human creation, a natural part of decisions we make. Within the RIA industry, a key component for relating to that reality is creating a culture of risk discovery, assessment and management. That culture should permeate both our firms and the relationships between advisors and their clients.
Rick Bookstaber, Ph.D., is 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 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 (2d Ed. Bloomberg, 2016).