I have often reflected on our industry’s attempt to bend risk profiles and whether this could actually hurt client outcomes.
From the early days of my financial planning reviews, to portfolio naming conventions and market commentary, there seems to be this broad acceptance that asset classes are rigidly defined.
Certain areas of our business (vulnerability, environmental, social and governance preferences, target setting, target assessment and cash flow modelling) are rightly left to be explored through the qualitative and pragmatic relationship between advisor and client.
You are not necessarily vulnerable just because you are of a certain age. I know people in their 40s who are most certainly vulnerable, whether due to serious illness or delicate personal circumstances. I also know people in their 60s who are more technically and financially capable than many of their younger peers.
Of course, that’s why vulnerability determination is a unique, fluid process that only those involved can truly agree with through open, honest, and collaborative discussion.
The same goes for the morals of customers and the way they like to invest their money. What satisfies one individual’s moral fiber may be very different from what satisfies another individual, or fund manager for that matter. How you handle a situation is extremely subjective and very personal.
What has baffled me for many years (and current financial market dynamics have fueled my perplexity even more) is why aren’t industry standards so pragmatic about asset classes and composition of portfolios as we are in other areas of personal financial planning?
Make no mistake, as advisors we have a duty to educate our clients about asset structures, their behavior over time and the differences between volatility and risk. This helps clients better understand what risk really is and what they can expect when it comes to investing.
Naming conventions
This part of the process is indeed subjective, pragmatic and collaborative. Where the industry makes this process more difficult is through naming conventions, regulatory descriptions, and the pre-determination of risk through asset allocation that does not take into account personal preferences or investment timelines. ‘an individual.
Take the example of the bond market. The state of the bond market has been debated for many years due to the unsustainable yield/price relationship. Now that we are dealing with high levels of inflation, hawkish central bank policy, and a Federal Reserve actively shrinking its balance sheet, we see the bond market in a state of wild uncertainty and instability.
While we know that when it comes to liquidation and insolvency, bonds are higher in the pecking order, but what I keep wondering is that in a globally diversified portfolio, what is the greatest risk, corporate-level insolvency or greatest asset write-down on record that has the ability to determine the fate of an entire asset class on a global scale?
