Editor's Note: This article is part of a Financial Advisor series "How I Solved It." Advisors describe a problem client and what they did to help.
It’s uncommon to see senior citizens with a huge affinity for equities. They tend to be afraid and invest more conservatively than they should in relation to their income needs. But sometimes equity-hungry elders, as this financial advisor has discovered, are too busy or too optimistic to evaluate whether they can afford a potential market downturn.
Derek Kennedy, president of Kennedy Wealth Management, an RIA firm in Knoxville, Tenn., is working with a couple (ages 71 and 66) that has an 80 percent allocation to equities. The older spouse is retired and has some health issues. The younger spouse is self-employed and works sporadically. “I don’t think we’re in crisis here,” said Kennedy, but he wants the clients to get a clearer picture of their income and expenses. It’s been a while since they’ve updated these figures.
Kennedy, who launched his firm in 2000, has never seen older clients so enamored with equities. The spouses, who have a sizeable portfolio and wish to pass wealth to the next generation, may be invested appropriately for their needs, he said. But if someone this age allocates 80 percent to equities, he said, “It’s a red flag that they better get it right.”
Kennedy didn’t know this couple during the last market downturn, but based on conversations, he said, “they just shrugged it off” and believed the markets would bounce back. “It’s great behaviorally that they’re not freaking out,” he said, “but I want them to have a healthy respect of what a market decline can do to their sequence of returns and how that can affect their income needs.”
He wants to ensure they have enough of a buffer if their expenses rise, the wife retires and the market behaves badly. He’s pushing them to provide their current household and medical expenses and to break out the drug portion, which can be particularly pricey.
“Allocation needs to be tied to income needs and stomach needs,” he said, referring to tolerance of volatility. Kennedy doesn’t consider himself a market timer but for the past two years, as the market has risen to unprecedented levels, he’s initiated deeper conversations with all clients about risk tolerance, conducted stress-testing and reiterated the importance of diversification.
As for this couple, “I don’t want to make their portfolio more conservative just because I’m nervous about it,” he said. Although they’d take his advice, he said, he’d prefer they make an informed decision. He had three or four conversations with the couple in recent months and has since been in touch as they’ve travelled for a family member’s health issues. He doesn’t want to bombard them with data and reading materials because conversations have been most effective.
“The technician in me wanted to have that information four months ago,” he said, but being an advisor is a balancing act. When clients react slowly, “you have to kind of nag,” he said, “and keep it on your own radar screen.”