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FAs Face Gaps in Perceived and Actual Client Risk Tolerance

December 6, 2017

The long-running bull market has made some investors complacent about proper portfolio rebalancing and may have given them an overly optimistic view of their clients' risk tolerance, Carrie Coghill tells the Wall Street Journal. But by showing clients real numbers to assess their actual risk tolerance, and with a bit of historical education, advisors can ensure clients are ready when the market goes sour, she tells the paper.

Certain wealth management clients aren’t keen on rebalancing toward a bigger allocation to bonds because of concerns about rising interest rates, according to Coghill, president and chief executive at Coghill Investment Strategies in Pittsburgh. But a client who, for instance, had a 60% allocation in equities 10 years ago may now be 66% invested in stocks, she tells the Journal. Getting away from the 60-40 allocation exposes such clients to more risk and could cause them to pull out of the market unwisely during a correction, according to Coghill.

To get clients back on track advisors at Coghill’s firm start by demonstrating the type of risk in their portfolios and then show them the effects of volatility with various equity mixes, she tells the Journal. They then look at the clients’ actual risk tolerance and educate clients about the role of bonds in risk management, according to Coghill.

To overcome clients’ perceptions of bonds as poor investments in a rising interest rate environment, advisors can demonstrate that historically, rates don’t rise continuously, she tells the paper. Coghill also explains to clients that the Federal Reserve will bring rates down again if the economy comes to a crawl.

Finally, advisors can look at the types of bonds most suitable to the economic environment, she tells the Journal. At Coghill’s practice, advisors currently recommend government bonds and other high-quality fixed income vehicles that historically outpace high-yield, lower-quality bonds in slower economies, she tells the paper.

By Alex Padalka
  • To read the Wall Street Journal article cited in this story, click here.