Most of the almost $20 million in investment portfolios that I’ve analyzed and graded this year have been on individual accounts. But a few, like my latest Portfolio Report Card on a $823,000 portfolio for a couple from Oregon, are joint accounts.
Joint accounts involve multiple people with varying personalities which can be challenging. Ideally, the joint owners will have matching goals, harmonious liquidity needs, and similar risk taking capacity. Yet, even the most agreeable couples or family members may have unique characteristics that make their investing styles incompatible. How should the investment portfolio for two polar opposites be geared?
He’s Aggressive, She’s ConservativeInvestment studies have shown that women are generally more conservative in how they invest their money compared to men. As a group, males tend to exhibit all the investing characteristics you’d expect from alpha types: a take charge attitude, hyper-active trading, self-confidence, and sometimes even over-confidence.
For the $823,000 portfolio I graded, I quickly discovered a joint investment account owned and managed by polar opposites.
My risk analysis found that he’s comfortable with investing in volatile sectors like biotech (NASDAQGM:IBB), technology (NYSEARCA:FDN), and solar energy (NYSEARCA:TAN). On the other hand, she’s more conservative and steers toward less volatile assets like large cap dividend paying stocks (NYSEARCA:DVY) and bonds (NYSEARCA:AGG). How are they able to achieve the same investment goal despite their differences?
A Happy MediumOpen communication is key to arriving at a balanced investment approach. Regardless of how different joint owners may be, they must absolutely agree upon acceptable maximum/minimum risk thresholds. One idea is segregating a portion of the portfolio to invest in higher risk strategies or assets while leaving the much larger core invested in a way that corresponds to the joint investment goals of everyone.
Sadly, most financial advisors and the investment firms they work at still have a naive or one-dimensional view for diagnosing a person’s true risk characteristics and whether these traits are compatible with the orientation of a person’s portfolio. This is especially true with joint accounts, where multiple owners may have multiple and varying risk profiles. Who’s risk profile should be adopted?
A Blended ApproachRegardless of whether the joint account is self-managed or advisor-managed, it’s typically the dominant personality among the joint owners that prevails. For instance, the spouse with the least amount of investing experience will often let the more experienced partner’s decisions become the default choice. This is wrong!
Instead of allowing the dominant person’s risk character to govern how the joint account is invested, financial advisors should use a blended risk profile on all joint accounts. It’s a logical approach for solving a complex problem. And any advisors or CIO’s that want to take credit for this novel idea, I promise not to tell anybody where you read about this. (Anyway, it’s something already embedded in the Portfolio Report Card.)
In the end, it’s OK to disagree about your investment approach, but it’s not OK to let your disagreements disrupt your investment plan.
Ron DeLegge’s is Founder and Chief Portfolio Strategist at ETFguide. He invented the Portfolio Report Card and his next Portfolio Workshop for financial advisors is on Tuesday, Nov.18 @ 1PM (EASTERN). Attendance is free.