Jack and Jill Hill need an advisor to help them with their investments and develop a financial plan. You sit down with them and quickly learn that their values and expectations diverge. So, what are you to do when this couple wants to open a joint investment account and develop a financial plan together? How can you meet their needs and avoid the risk that one of them will later complain or sue you? Although risk tolerance in joint accounts cannot be a negotiation, separate accounts can be opened and a financial plan can be developed to reflect their differing goals. So, how exactly would that work?
Jack says he wants a big house in the city, a cottage in the country and an upgrade to their car. In contrast, Jill, saying very little during the meetings with you, does express that she would like to pay off their condo and save for substantial down payments for her dream home in the suburbs instead of taking on more debt. When the discussion turns to risk tolerance — you guessed it —Jack wants to take on more risk and is prepared to lose some capital in favour of higher potential returns. Jill, however, is much more conservative and is worried that the loss of any capital will impact whether she can get her dream home.
So, can you open a joint investment account for Jack and Jill, putting them in 100% medium-risk investments as a compromise position? The problem with that is that a 100% medium-risk account is not an average of high- and low-risk investments, it’s a blend of medium-risk investments. Thus, the answer to that question is “No” — and there are several reasons why.
If Jill is conservative and doesn’t want any portion of her account in risky assets, and her joint investment account with Jack is 100% medium risk, then the account will be operating unsuitably for her. If there’s a market correction and Jill loses part of her savings, she will be disappointed and might sue you or deliver a complaint against you to the regulator.
Similarly, a 100% medium-risk account will also not be reflective of Jack’s risk tolerance as he wants his assets in investments that have the potential to grow more quickly and is willing to take the risk of losing a portion of his capital. Although he may not sue you— as the argument that he ought to have made more money is a difficult one to win — he may move his account to another advisor in short order if he is disappointed with the small returns, and Jill may very well follow. Thus, this would result in the loss of two clients.
Therefore, in a case in which two people have different risk tolerance, a joint investment account is not a good idea. Instead, they should handle their investments separately and move their returns into a joint savings bank account or a low-risk joint account with an advisor, investing only in money market funds, with the intention that this couple will need the money in the short term for purchases of real estate or other family assets.
However, a financial plan is different than a joint investment account and can indeed reflect the diverging values of the couple. So, you — if you’re a financial planner or you have access to one — can definitely build a financial plan for them together. The financial plan needs to take into account what their goals are, both individually and as a couple, and it can, indeed, reflect this. During this process, you will collect details of their assets, liabilities and incomes as well as delve into details of their personal goals and describe their diverse goals in the financial plan and how they can achieve a compromise by saving certain sums. This is permitted and expected.
Jack and Jill will sign off and you will have to meet with them regularly to update the financial plan and assess their progress. The regulators and judges will not blame you for attempting to build a financial plan that seeks to reflect a compromise for a couple with different goals.
So, you need to understand that although risk tolerance in a joint account cannot be a compromise, a financial plan will no doubt have to incorporate compromises when two people such as Jack and Jill have diverse values and risk tolerance but want to build a life together.