What To Do When Couples Have Differing Risk Tolerances

News Flash! Spouses don’t agree on everything.

Actually, the marriage license has little to do with this. Get any two people together and it is likely there are significant differences of opinion about many important topics. That’s life, and it’s normal.

But since money is an important topic, spouse disagreements also pose challenges to financial planners.

On paper (or on screen), most financial planning software presents numbers as if the couple has agreed on their goals. In many cases, it’s fine because the couple has negotiated those figures, and ideally this has happened with the help of their financial planner.

The planner can help them identify and quantify the trade-offs, and the couples can decide how to balance them. “If you want to pay cash so Junior can come out of college with no debt from an Ivy League school, you can be confident your retirement income will be at least $X/month. If he goes to an in-state public school, $Y/month is more likely.” It is up to them to decide if the difference between X and Y is what they want and make choices accordingly.

Those types of negotiations seem to trouble couples far less than having to figure out what to do when their risk tolerances are wildly different.

It’s important to assess those risk tolerances, but few seem to agree on how to do it. The quality of the assessment tools varies widely.

PlanPlus conducted a study for the Ontario Securities Commission in Canada that found pervasive problems with the questions people were asked about their risk appetites. The questionnaires studied had too few questions, had confusing and poorly worded questions, or had arbitrary or bad scoring models. Some tests didn’t even ask subjects basic things like their ages, incomes, net worth, investment knowledge, experience or goals. The study went as far as to call three of the scoring models on the 36 questionnaires “dangerous.”

Even if you use a valid assessment tool, there is great debate about what to do with the results. The assessment says “Jack” has a moderate risk tolerance, but he is scared to death to be in equities. His risk perception does not jibe with his tolerance.