Helping Settle a Risk-Tolerance Dispute

Austin Kilham for the Wall St. Journal writes: The clients were a wealthy couple in their early 60s. He was a retired financial consultant who was comfortable taking a lot of risk in his investment portfolio. But his wife had a very low risk tolerance for her retirement account.

Their opposing views had caused tension and arguments between the two when discussing how to best manage their retirement savings. As a result, they had settled on a compromise that neither was happy with: Both spouses allocated about 40% of their retirement savings to equities.

So they turned to their adviser, David Frisch, for help crafting a better solution. Mr. Frisch is the president and chief executive of the Melville, N.Y.-based Frisch Financial Group, which manages $275 million for 350 clients. "My main concern was getting them on the same page and working together," he says.

The couple's assets were split between a savings account and their two separate retirement accounts. The husband was withdrawing about $10,000 a month from his accounts to cover their living expenses. Meanwhile, the wife was reluctant to withdraw any of her money for fear that it would hurt her ability to accrue interest and grow her savings.

Mr. Frisch didn't think it was wise to draw from only one partner's account. So he developed a strategy to put both of them at ease with the amount of risk in their accounts, and make each amenable to contributing equally to their monthly expenses. "I came up with a plan that sounded so simple to me, yet they had never thought of it in 40 years of marriage," he says.

Mr. Frisch suggested that they adopt separate investment strategies to balance the risk between the two accounts, giving the husband a riskier portfolio and the wife a more conservative one. Under the new plan, the 55% of the husband's portfolio would be allocated to equities, while the wife's portfolio would hold on 10%-15% equities.

This approach allowed the husband to take on some riskier investments--including individual stocks of his choice--while reducing the wife's concern about volatility in her own portfolio. Although each portfolio was slightly off balance from what Mr. Frisch would normally recommend for clients their age, the two portfolios balanced each other. As part of the new arrangement, Mr. Frisch also recommended that each spouse draw $5,000 a month from their accounts to contribute to household expenses.

The adviser also wanted to use the two portfolios to maximize their tax efficiency. The husband's portfolio included a large individual retirement account, where Mr. Frisch placed higher-growth assets that would otherwise generate higher taxes. He then placed more tax efficient vehicles, like municipal-bond funds, in the wife's taxable investment portfolio.

The couple was happy with the new compromise. They have agreed to monitor performance in those accounts and shift the amount each partner contributes if one portfolio is significantly down compared to the other, says Mr. Frisch. And the new, customized asset allocations are likely to provide the combination of growth and stability needed to help them live comfortably into retirement.

"The wife is comfortable knowing that her statements are only going to change slightly from month to month, and the husband knows that they have enough exposure to fast-growing investments to provide income throughout their retirement," says Mr. Frisch.