What’s more, it’s often difficult for advisors to get a clear read even on their clients’ current risk tolerance. Most clients aren’t really in a position to figure out what it is. They often give a highly unreliable guess, something that sounds consistent with their self-image, though it perhaps runs the gamut from prudent stewardship to swashbuckling entrepreneurialism.
Advisors can give their clients risk questionnaires and other assessment devices that seem objective and give the parties a “paper trail.” But these have the same limitations. They might launch a risk dialogue, but they aren’t sufficient in and of themselves to start executing plans, and they should never be the end of the discussion.
An Ongoing Dialogue
To analyze and manage a client’s portfolio risk requires ongoing, in-depth client/advisor dialogue. The continuous challenge is to have the insight necessary to keep the portfolio on the right track as the client’s objectives and tolerance change with the ups and downs of wealth and life experience. Real risk management means advisors must use this insight at the portfolio level. They have to use both their technical expertise and strong human relationship skills. They can support this effort with the proper risk management tools. They should be able to discern subtle nuance in clients’ objectives and motivate clients through the uncomfortable follow-through when it’s time to make difficult decisions.
These abilities will likely remain the advisor’s essential professional service.
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.
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. He co-founded the Personal Financial Planning program at UC Berkeley and has written several books, including Managing Concentrated Stock (2d Ed. Bloomberg, 2016).