As advisors check out the wares at the nation’s premier fund show, the Morningstar Investment Conference, a recent research paper from the Chicago-based firm serves as a reminder that financial investments are just a part of a holistic view of a client’s wealth.

In “No Portfolio is an Island,” Morningstar researchers David Blanchett and Philip Straehl work off the insight that investors effectively “own” more than just stocks, bonds and cash, but also their human capital, real estate and pensions.

By taking these into account, as well as vital inputs such as age (when human capital is usually at its highest), holistic planners can more correctly optimize the allocation of financial assets in a portfolio.

The authors define human capital “as the total economic value of an individual’s set of skills and talents,” which “varies by age, health, education, occupation, industry and experience, among other variables, and is nontradeable.”

Just as financial assets have different return and risk characteristics — for example, annual returns on real estate investment trusts averaged 12.36% between 1993 and 2013 with a 19.76% standard deviation, whereas cash averaged 3.07% with a standard deviation of just 1.06% over the same period — so too do specific industries have varying returns at different times.

Comparing various industries to corporate bonds (because they share the characteristic of providing income, and from the same cash flow), the authors calculate various industry “discount rates” that are all over the map and vary from one period to another.

The growth of that income also varies, with health care workers seeing an average of 2.7% growth from 1992 projected through 2022, while miners face declining real wages at a rate of -0.9% over the same period.

Delving deeper, the authors look at correlations between financial assets and occupations and find that human capital more typically corresponds to fixed-income investments (echoing Moshe Milevsky’s question “Are You a Stock or a Bond?”).

Write Blanchett and Straehl:

“There are some notably high correlations, for example the correlation between the human capital of the real estate industry and the return on REITs is .602. This is an intuitive relationship, suggesting that changes in the value of REITs have a significant and positive relationship with the wages in the real estate industry. The obvious implication is that individuals who work in the real estate industry should likely have a lower (or no) allocation to REITs in their financial assets than individuals who work in other industries, such as manufacturing…” Performing optimizations for a 45-year old, the authors find that REITs are suboptimal for all workers and that workers in most industries should skew heavily toward large growth, small value and commodities.

This discussion is just theoretical, because the portfolio takes into account just financial and human capital. But adding in housing and pension wealth, and accounting for different ages, financial advisors can readily see how deep and customized holistic financial planning can be.

For example, the average monthly Social Security benefit is $1,269; unlike labor income, whose discount rate was represented by a corporate bond, this income stream would have a discount rate comparable to Treasury inflation-protected securities. One can intuitively grasp that the addition of this income would shift optimal allocations further in the direction of risk assets, depending on age and total wealth.

Housing wealth, which represents 29.43% of total assets on average, also materially affects the wealth picture. And just as different industries have varying risk and growth characteristics, so too do different regions affect optimal allocations, with volatile Las Vegas and Miami skewed toward offsetting bonds and placid Cleveland and Charlotte balanced via a higher allocation toward stocks.

When Blanchett and Staehl crunch the numbers for a holistic allocation based on all these factors, and based on a detailed a long list of hypothetical assumptions (again, indicating how customized financial planning needs to be), they discover that financial capital — often the be-all and end-all for many advisors — takes on humble portfolio profile.

“Even at their peak, financial assets never account for more than 50% of the total wealth of the individual…,” they write. “Therefore, how can an asset allocation based entirely on less than half of a client’s assets truly be optimal?”

Check out How Real Advisors Can Steal the Robo-Advisors’ Advantage on ThinkAdvisor.