SOLVING THE CLIENT PUZZLE WITH HOUSEHOLDING

Financial planning often involves managing multiple accounts. These accounts have specific risk profiles, but individually, they do not represent a client’s full risk picture or even total wealth. In fact, when accounts are viewed together, the aggregate risk may look very different. How can you gain more visibility?

Context is important for vision. Managing risk at the household level – known as householding – can provide greater transparency across holdings to create a more complete picture of risk. Seeing how everything works together enables a bigger picture understanding of what’s going on.

Advisors who can do this well, not only for the accounts they manage but also for investments outside their relationship, can better support their clients’ full financial goals.

Capturing the context of client portfolios

Different accounts make it easier for firms or advisors to manage client assets and distinguish them among types, such as a retirement account or an advisory account. But that is not how clients see themselves.

Clients’ wealth – and portfolio risk - are the sum of their accounts together. Clients often have accounts with multiple relationships, such as a 401(k) plan with their employer or a 529 college savings plan in a different system. Such accounts are also part of their total wealth.

Looking at a list of accounts could confuse clients as to what they are supposed to understand about their investments.

Let’s consider for a moment the ancient parable about blind men and an elephant. Each man, who could not see, felt a different part of the elephant to make sense of it. But because they each only touched one part of the animal, it skewed their experiences, and ultimately, led to contrasting descriptions about what kind of animal they had encountered.

Putting the puzzle pieces together

How can you minimize such assumptions when it comes to managing portfolios? Here’s an example to explore householding further. We selected the portfolio of a hypothetical Barbara Smith. In her household, she has six accounts including a concentrated equity account, municipal bond account, covered call strategy, private alternatives, SMA account and angel investments account. The respective portfolio risk of each account varies significantly at 23.01, 3.31, 18.08, 10.67, 16.82 and 60.83. Below is the representation of all of Barbara’s accounts.

Portfolio risk of individual accounts in Barbara Smith’s household

When you look across her accounts, notice their variations in investment style. If you view Barbara’s accounts as part of a household, you’ll see that she is an overall aggressive style investor. She doesn’t mind taking on additional risk if there’s potential for additional return, and she is open to taking positions in angel investments that might relate to causes she believes in.
Her angel investments account comprises most of the portfolio risk. Is this an issue to flag?

When we look at the risk of that account in isolation, it seems like it could be.

You’ll see that at a portfolio risk of 60.83, the angel investments account seems far outside her risk suitability range. As defined by her advisor’s firm, it’s between 9 to 19.5. But what about at the household level?

What does householding look like?

When viewed as part of the household, the risk taken is well within the risk suitability range established by the advisor. The householding analysis is more representative of the overall risk she’s taken on across all six accounts.

If the household risk had been out of range, the advisor could have looked at the underlying accounts to figure out a solution to align Barbara’s full portfolio with her financial goals.

Don’t lose sight of client assets with narrow vision

That’s why householding matters in getting to know a client. An incomplete picture could lead to less favorable positions. Imagine the weather’s getting chilly outside, and you need a coat. Is one already hanging in your closet? Folded in a box somewhere? Plopped on a stack of clothes on a chair?

Your wardrobe is all your clothing combined, not just one coat, and it can be in various places. A household is the totality of accounts, the investments inside them and wherever they may be held.

With householding, clients’ risk exposure can be better aligned across advisory, brokerage and assets currently held away from advisor relationships.

A more complete view with Aladdin Wealth™

The Aladdin Wealth™ platform can help wealth managers perform analyses and proposals at any level – by an account, a group of accounts or total householding including external assets. It provides transparency into risks taken across a client’s total wealth. When financial advisors have a deeper understanding of the full risk picture, it enables them to better align those risks with clients’ portfolio goals.