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.

The investment assessment for “Jill,” meanwhile, says she is aggressive and wants to “go for it” but the situation makes you uncomfortable about being in an equity-heavy portfolio because a nasty bear market could put her goals in jeopardy. Her risk capacity conflicts with her tolerance.

So not only does your assessment conflict with the dimensions of risk, capacity and perception, but Jack’s results conflict with Jill’s.

It sounds like a problem that only plagues young newlyweds, but it’s actually common for clients in all age groups. I’ve seen it happen to retirees who have been married for decades. Often, the issue is that they have “enough,” so one logical argument is that if they can afford to take on risk, why shouldn’t they? The counterargument is also compelling: Because they have enough, they don’t need to take on much risk, so why should they?

Among the approaches I have seen to navigating a couple’s conflicting risk tolerances is to either negotiate a common portfolio or create two (or more) portfolios. Then you can use the assessments as a coaching tool and also select the level of risk for the client. Naturally, this approach can work if the planner is good at handling the accompanying negatives.

I haven’t seen a study done on how planners handle risk conflicts among couples. Anecdotally, it appears to me that negotiating a common portfolio is the most common approach. I can’t say this is driven by planning software, but it is convenient that most software essentially asks for a unified portfolio to run its calculations.

In the case where Jack is moderate and wanting to be conservative and Jill is as aggressive as wants to be, the likely resolution is a moderate portfolio mix. And most planners would probably go along with that idea, especially given the risk capacity concern.

The planner’s task is then to educate the clients about expected portfolio behavior and coach them accordingly. We don’t want Jack to freak out when markets are doing poorly or when he fears they will do poorly. We also don’t want Jill to get greedy or suffer from FOMO (fear of missing out) when markets do well.

The coaching on this usually revolves around the goals and the relationship of the couple. Most of our clients’ longer-term goals could benefit from a range of different portfolio structures that would all work well for them. I haven’t seen a goal for which a 60/40 was appropriate but a 55/45 wasn’t. If the portfolio was reasonable to begin with, neither a bull nor a bear market is likely to make the mix a poor choice.

Even if Jack and Jill both agree that the mix isn’t what they would do if left on their own, they know that they agreed to do it together and that each could feel uneasy in certain situations, Jack when markets fell and Jill when they rose. By identifying those situations ahead of time and discussing them, Jack and Jill would be less likely to abandon a sound plan.

If, on the other hand, the portfolios are split up, and some is put in a conservative mix for Jack and some in an aggressive mix to appease Jill, overall the effect could be moderate in the aggregate. Jack is likely to be happy during bear markets and Jill happy during bull markets. (This is particularly popular if one of them has an ex-spouse.) All is good, right?

Not exactly. If a moderate mix is “right” for the goal, both the aggressive and conservative mixes can each be “wrong.” So you might have issues managing Jack and Jill’s perceptions. Furthermore, in practice, we must deal with what types of accounts the couple owns and how much is in each type of account.

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 the 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 most of their investment assets in one spouse’s company retirement plan. These are universally reported as one portfolio.

A third approach I see is for a planner to pick an appropriate mix using the couple’s stated goals—regardless of what they say in their risk tolerance assessments. The assessments can be used to start conversations about risk, but as long as the portfolio mix is appropriate to the goal, the planner’s task is mostly to coach clients to stick with it.

The key difference from our first approach in which we mixed portfolios is that the couple decided on the mix they could live with in that case. In this case, the planner decides on the mix and helps the client live with it.

In fact, some firms use this approach without a risk tolerance assessment tool at all. They focus on risk capacity and the client’s overall financial situation to create the appropriate recipe of assets. 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 that, for some clients, the 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 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., a consulting firm based in Seattle.