Evaluating client risk: 9 takeaways for advisors

July 26, 2022 3:10 PM

Enjoy complimentary access to top ideas and insights — selected by our editors.

In tumultuous financial times, it is important for advisors to reassess their clients’ risk tolerance. While rising inflation and volatile market conditions are many, these hot-button issues have even more importance for those close to retirement with limited funds.

Read more about strategies advisors are using with their clients to work through these struggles in our roundup.

These unconventional strategies may help inflation-besieged clients in the retirement zone

The historic levels of inflation are impacting all U.S. consumers, but the situation is even more concerning for those close to or in retirement.

Retirement accounts often rely heavily on bonds, but recently bonds have declined and become more unstable than stocks. This may have clients wondering if the strategies used during the 2008 financial crisis might be useful once again.

Instead of giving up on stocks and bonds, one expert suggests it could be wise to change to investments that acknowledge the contingencies of falling markets, allowing investors to monitor higher inflation and maybe even prosper.

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These unconventional strategies may help inflation-besieged clients in the retirement zone

An elderly couple walk arm-in-arm past an outdoor cafe terrace in Edinburgh, U.K., on Wednesday, July 31, 2013. The latest opinion polls show supporters of Scottish First Minister Alex Salmond's campaign for independence lagging behind those in favor of the status quo by more than 20 percentage points ahead of the Sept.18, 2014, referendum. Photographer: Simon Dawson/Bloomberg

Bloomberg News

Retirement investors were jittery about stocks even before bear market, new data shows

In May 2022, many future retirees were already nervous about equities and wondering how to limit their exposure in the wake of a tough market, according to data from Financial Planning.

“Clients are nervous and want to be more conservative with equity positions by using higher-quality, cash flow positive positions,” one respondent said in the latest Retirement Advisor Confidence Index.

The survey, which collected responses from 200 retirement advisors, found that 77% adjusted their strategies due to fears of a recession.

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Retirement investors were jittery about stocks even before bear market, new data shows

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Refinanced student loans offer big returns — and risks

Amid struggling financial markets, advisors are increasingly turning to student loans as an investment opportunity with potential returns. Yrefy, a specialty consumer finance lender, is putting together its fourth investment portfolio of refinanced distressed private student loans. These loans are then converted into income streams for accredited investors who can commit at least $50,000 for one to five years.

“We decided we needed to build something that would be attractive both to the independent registered investment advisor, as well as direct consumers,” said Laine Schoneberger, chief investment officer and managing partner at Yrefy.

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Refinanced student loans offer big returns — and risks

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Private equity funds for retail investors? Advisors see serious risks

Private equity giants have been looking for ways to bring more investors on board for some time, including retail investors. So much so that the SEC issued a warning to retail investors about conflicts of interest, higher fees and expenses, and an overall lack of transparency.

Private equity has always been reserved for institutional investors such as banks, pension funds and insurance companies, which have the credibility and volume to extract profit from the private market. Since retail investors pick and choose their own investment products, they are restricted to publicly traded securities.

“I think PE funds are dangerous if clients are buying something they don’t understand and will be locked up for a long time,” said Jonathan Foster, CEO of Angeles Wealth Management.

“They are getting the stuff that couldn't get distributed via the institutional market, and they're paying extra fees. That can't be a good equation.”

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Private equity funds for retail investors? Advisors see serious risks

Saving clients from themselves by quantifying risk tolerance

People often take an aggressive stance when the stock market is in a good place. When it drops, investors end up making bad decisions out of fear and often miss out on potential growth and earnings. Investors can also be too conservative and miss out on some potential growth when they have not determined their ability to tolerate risk.

Software tools, such as Riskalyze, allow an advisor to take a client through various scenarios and answer questions along the way to assess risk tolerance. Still, risk assessment only works if the client is honest with their advisor and themselves.

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Saving clients from themselves by quantifying risk tolerance

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Rise in thematic ETFs comes with high fees, more risk, study says

Thematic ETFs and their related underlying indices contradict the traditional goals of index investing, according to a study from the EU Business School. These funds have higher fees, higher tracking errors, lower liquidity, lower diversification and are overall riskier investments.

While thematic ETFs can help investors profit, they could also lead to dramatic losses if there is a major change or a new trend. For example, in the early days of the COVID-19 pandemic, the technology sector performed well while the energy sector suffered dramatically.

“To me, it’s no surprise that many thematic ETFs in vogue today focus on technology and not energy. But now here we are in 2022 with the energy sector up nearly 50% and the technology sector down over 20%. Things can change really quickly,” said Bryan Minogue, founder of Kardinal Financial.

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Rise in thematic ETFs comes with high fees, more risk, study says

3 tax tricks financial advisors can use for risky, overweight portfolios

Many investors' retirement funds grew during the COVID-19 pandemic, and these people now own dense stock in single companies, causing problems with a lack of diversification. These investors are using advisors with the goal of keeping the value of appreciated stock and rebalancing their portfolios, while not getting hit with too many taxes.

One potential solution is exchange funds offered by large investment management firms such as Eaton Vance, Goldman Sachs and Morgan Stanley. In these funds, investors swap their individual shares for a pro-rata share of a diversified fund that holds others’ individual shares.

Under IRS rules, investors must wait seven years to receive their share of a diversified basket of stocks, according to Andrew King, the vice president of tax policy and research at Goldman Sachs Ayco Personal Financial Management. “The investor should determine if this option is suitable based on their investment objectives and risk profile,” King said.

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3 tax tricks financial advisors can use for risky, overweight portfolios

Nasdaq Index Is Poised For Worst Start To A Year Since 2008

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How to have ‘the talk’ with clients when crypto tanks

The volatility of cryptocurrency can lead investors to act out of fear. When working with these clients, it is important for advisors to explain the underlying characteristics of crypto investments to guide them through times of potential uncertainty.

Conveying the importance of proactive preparation as prevention is key. Truly understanding crypto and historical performance and passing that information along to clients is helpful in preventing fear. In a rough crypto market, assessing your client’s risk tolerance can prevent poor reactions.

As an advisor, it may be important to keep having these conversations with your clients as cryptocurrency continues to increase in popularity.

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How to have ‘the talk’ with clients when crypto tanks

House Financial Services Committee Hearing On The Equifax Data Breach

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Meme stocks exposed bad business practices, poor risk management, House committee says

Post investigation into meme stocks after the Game Stop Frenzy in 2021, a report was released by Maxine Waters, a Democrat from California, and Al Green, a Democrat from Texas who serves as chair of the Subcommittee on Oversight and Investigations.

“Payment for order flow and gamification make it profitable for a new generation of trading apps to push retail investors to make as many trades as possible, making the markets more volatile than ever,” Waters said.

“The report reached multiple key conclusions, including the finding of existing deficiencies with the current market regulatory structure,” Green said. “My hope is that the report’s findings will lead to improvements in the functioning and regulation of the U.S. securities markets and result in a more fair and secure system for all investors.”

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Meme stocks exposed bad business practices, poor risk management, House committee says: Wealthtech Weekly