Broker Check

The Risk Conversation

When I sit down with a prospective client for our first serious-money conversation, I like to talk about “big picture” things like what they want to achieve and what we have to work with. If possible, I’ll postpone talking about portfolio risk until our second meeting. That gives me time to analyze the raw data we collect to see what the risks are - and aren't.

This may not sound like a big deal but it goes to the very heart of my role for the people who trust me with their money. Advisors who use managed investment packages generally talk about risk more quickly. New clients are asked to select their personal risk comfort level from a check-list like this 1:

The account form goes to a portfolio manager who picks investments that meet fairly rigid stock, bond, cash (and possibly alternative investment) weightings based on that risk choice. For example, an “income with growth” option might specify 40 to 50% stocks, 40 to 50% bonds and as much as 10% elsewhere. Individual investments inside those categories change but the basic percentages are not affected by market conditions. Clients have to authorize changing their box.

This works well for advisors. Someone else makes the daily buy and sell decisions so they don’t have to watch the account very closely. It also means they have a portfolio ready for go for almost any prospect at any time regardless of financial conditions.

The investment philosophy that gives us this method explicitly states that the most important factor in how a portfolio performs depends on how the assets are allocated. 2 I’m not always on board with this school of thought but I heartily agree with this part. It matters much more than security selection within the allocations.

As much as I agree with the concept, I really dislike the “risk-based” sales approach. Pursuing your goals using securities depends on your investment results. Investment results depend on your asset allocation. That asset allocation also defines how much portfolio volatility (fluctuations up and, especially, down) you are taking. Allocation and risk are inseparable.

In the example above, the advisor is asking the client to make the most crucial decision of his investing future while the professional handles the lesser details for a fee.

I delay the risk conversation because the most important investment service I can perform is telling my clients what their risk tolerance should be.

We won’t know that until we know how much they need to make and how long we have to make it. It is just math. It might take us a while to get all the data analyzed but once we hammer-out our target rate-of-return, prudent investment strategies become very clear. We have a plan and from that point on, every investment decision must align with the goals.

My approach costs me business. People come in with a variety of assumptions about portfolio risk. They range from well-reasoned to emotional terror. Telling them how much volatility they should be prepared to accept can be a shock. After all, that nice young man at the bank told them they could choose their own risk level and get free checking too.

This simple, moral decision forms the foundation of our practice. I will not offer you an investment strategy I think has no chance of working toward your goals because I need to make you feel safe to get your business. Years from now,when that cookie-cutter portfolio doesn’t reach your goal, that nice young man has to explain that his firm followed industry guidelines based on the check-box you signed.

I want to have that risk conversation as soon as possible - regardless of how my advice is received. Sometimes people should consider more risk, sometimes less and it may be fine now. The important thing is that the number will be based on their goals. Often times, our next step is to see how realistic those goals really are. Is less portfolio volatility worth a couple more years at work or keeping a car longer … maybe contributing less for education or charity? If something has got to give, now is the time to decide.

It is a courageous decision but you aren’t alone. Our risk management job doesn’t stop when you check a box. We help you manage risk both strategically and emotionally.

We have to because we actually do change asset allocations based on market conditions. We may be more aggressive than your conventional asset allocation model when opportunities are attractive. At times we may be much more conservative - even eliminating certain asset classes. You don’t fly into hurricanes and you don’t always need to be “all in”. You will always know what you have, why you have it and why that situation might change. What you won’t get from me is the company line about holding weak assets for strategic balance when the truth is: I can’t actually do anything about it - somebody in New York makes those decisions and you did check the box. I’ve been there and I hated it.

So, back to the box. Was it checked for the right reasons? Who is supposed to do something when things change? If the answer to the second question is you, I’m not sure you’re getting your money’s worth. Give me a call at (828) 654-8100 for a complimentary, confidential chat. We’ll find out.

The opinions expressed here are solely those of Helms Wealth Management, LLC. Investing has inherent risks that should be carefully considered before investing or sending money. Past investment performance does not guarantee future results. Managed investment products may be offered by prospectus which contains the full legal description of terms, conditions and charges. This is not a recommendation to invest in any advisory account.

1 This chart is from my own fee-based SAM II advisory account. This is not a recommendation!

2 See Beginners Guide to Asset Allocation, Diversification and Rebalancing