Widening the View of Risk Tolerance

Clients need to think about how much they're willing to risk when it comes to long-term care

One of the most valuable services a financial advisor can provide to retired clients is an assessment of the finance-related risks they face and choices on how they can deal with them. However, I believe that many financial advisors do not adequately address all of the risks. They spend most time on how their clients feel about one risk that actually is not that useful to understand, and far too little time on other finance-related risks that are crucial to understand and highly actionable, for example, long-term care risk tolerance.

There is often a lot of time spent on investment risk tolerance, but it typically is not measured well. Many advisors say their clients assert they are investment risk tolerant when the market is up, but not when they suffer a loss. Minor adjustments to risk asset allocation do not make much of a real difference. Further, most must take some investment risk to get the returns they need, even if they are not tolerant to risk. It really is less important to understand client investment risk tolerance than just explain the risks and make a recommendation.

Dealing with the risk of needing long-term care is actually more complex. One strategy can help assure that a client can get quality long-term care - getting long-term care insurance – while another strategy is risky. If nursing home costs go up just 4% a year, your 65-year-old clients will face an average nursing home cost of over $160,000 a year at age 85.

I have seen the importance of quality long term care. My father has long-term care insurance and can therefore afford round-the-clock care at home. But my best friend’s mother, who spent down to Medicaid, is now sharing a room in a smelly nursing home that accepts Medicaid with a person who wakes her up every night. In long-term care, quality sure makes a difference! There is often a big difference between facilities that accept people on Medicaid and those that only seem to find room for those who can pay privately.

Some people are long-term care risk tolerant, others are intolerant of this risk. To serve your clients well you must know how they feel about this risk and then make a strong recommendation. Measuring investment risk tolerance sensitizes people to that risk and can lead to a useful discussion. I suggest the same effort on long-term care risk. A few detailed questions on that issue will help your clients think through how much risk they wish to take, and protect you when they see the nursing home that will accept them.

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