Investment planning insights in retirement

Accurately assessing emotional risk tolerance and other key factors in client investment comfort can make a huge difference in successfully managing retirement investment portfolios.

Client comfort is a key component in successful investment planning. How can you best assess a person’s risk tolerance, while helping match their assets and cash flow with spending?

Assessing True Risk Tolerance

According to Thomas J. Trainor, CPA, CA and managing director of the Hanover Private Client Corporation in Toronto, Ontario, risk tolerance has two facets:
  • financial capacity
  • emotional capacity

“Determining a client's financial capacity for risk is a mathematical exercise,” he says. “It is a function of asset and income requirements, as well as the amount and nature of the assets. On the other hand, emotional tolerance for risk is much harder to judge. While questionnaires and the use of professional judgment are frequently used, it is still very hard; a client’s emotional risk tolerance changes with the market conditions.”

While the financial capacity for risk is ruled by the client's numbers, emotional capacity can be improved over the long term through consistent education and building risk tolerance over time.

Matching Assets and Cash Flow

Assets should be allocated based on volatility within the time frame in which they are required, and looking at the client's portfolio of pensions or other types of annuities that they may have.

“Look at spending in 5‐year increments; in 10 to 15 years, introduce equity for those components of the portfolio,” says Trainor, “We wait that long because there’s a minimal chance of a negative return if you hold an equity portfolio for that period of time. Over time, re-balance the portfolio and add up the individual tranches to determine the overall asset mix.”

Human Capital Factors

Another factor to consider is the amount of income a client can generate in his or her lifetime, as well as the stability and consistency of that income.

“A surgeon or tenured professor will have very stable income regardless of economic conditions, while a commissioned sales person may see his or her income and employment opportunities vary widely. This will directly impact the level of risk that the individual can take in the portfolio.” 

Whether a client is self‐employed or an employee of a large company, the human factors of morbidity and mortality will also factor in making a complete assessment of lifetime employment income.

For more information like this, check out the 2016 Advanced Personal Financial Conference—the leading technical conference for financial planning professionals. Special pricing for CPA Canada members.