We Can All Become Vulnerable Investors

Can Vulnerability Affect Investors at Any Age?

Vulnerability is something broader than age or frailty. Illness, retirement, marital problems and extreme stress can all change the circumstances in which somebody makes financial decisions. A person who has comfortably accepted investment risk for many years may react very differently while:

• seriously ill;
• recently widowed;
• separating from a spouse;
• facing a job loss;
• caring for a sick family member;
• approaching retirement; or
• suddenly dependent upon their portfolio for income.

A person’s intelligence may be unchanged even though their circumstances have changed. Life events are foreseeable in general even when their timing is not. An advisor should consider how those changes could affect a client’s risk tolerance and financial plan.

Why Can the Timing of a Life Event Matter?

Imagine someone who has historically been comfortable with market fluctuations. Now suppose that person becomes seriously ill at exactly the same time markets fall sharply. Their attitude toward uncertainty may change dramatically.

That does not necessarily mean their previous financial plan was wrong or that their new concerns are irrational. It means risk tolerance exists in the real world. That is why knowing a client should be an ongoing process rather than an event occurring when an account is first opened.

How Can Separation or Divorce Change Investment Needs?

A separating investor can suddenly face circumstances very different from those on which an investment plan was constructed. Liquidity needs may change. Assets may have to be divided. Expenses may change. The ability to absorb an investment decline may be different. Old KYC information can therefore become less useful precisely when important financial decisions have to be made.

How Can Retirement Change the Consequences of Risk?

An investor accumulating money while working may have time and employment income with which to recover from losses. A retiree may be withdrawing rather than contributing money. That distinction can materially change the consequences of investment risk. Again, age alone does not answer the question. The advisor needs to understand what the money is for and when it will be needed.

How Should Changes Be Communicated to Your Advisor?

An advisor cannot know everything occurring in a client’s life. Clients therefore have a role too. If something has happened that could change your need for income, access to capital, tolerance for losses or investment objectives, tell your advisor. And advisors must create opportunities for clients to tell them. That’s not an annual confirmatory email – that’s an ongoing and meaningful dialogue. At times, the advisor must probe beyond surface responses. The recurring theme is communication.

What Should Be Reviewed After a Loss?

After a significant loss, it can be important to reconstruct the circumstances existing when the advice was actually given. That includes before an Investment Policy Statement, before a trust’s mandate, and before each trade in a non-discretionary account. The questions may include:

• What did the advisor know?
• What did the client say?
• Had the client’s circumstances recently changed?
• Was the advisor told?
• Were the investment objectives or risk information updated?
• Was a recommendation reconsidered?

The answers will depend upon the records and facts of the individual case. If a significant life event changed your financial circumstances and you are concerned that your investments or advice did not change with them, it may be worth reviewing what happened.

For information about our services, see elder financial abuse.

Frequently Asked Questions