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.