This is the latest in a series of columns about portfolio strategies, financial planning and asset management.
As an advisor, you may assume your clients seek to maximize their holdings. It only makes sense — who wouldn’t want to get the most financially from their portfolios?
That’s not always the case, though, as Morningstar’s Christine Benz, personal finance and retirement planning director, noted in a recent post. Understanding your clients’ portfolio approach can make a difference in your own approach with them.
Benz makes the case for a “good enough” portfolio, detailing differences between “maximizer” or “optimizer” investors, who “love steeping themselves in the research about how best to create a financial plan and manage a portfolio,” and so-called “satisficers,” a term combining “satisfy” and “suffice,” she says.
The latter group wants an acceptable investing option, not necessarily the best one, Benz explains. They don’t want to spend much time drilling into every issue, although they’re interested in topics like retirement lifestyle and leaving an inheritance — in having enough — she says.
“They’ve set their asset allocations, populated them with low-cost index funds, and moved on to other things,” she wrote, adding that the financial services industry — and specifically the annual Bogleheads investing conferences she helps run — may not spend enough time asking investors where they fall in the “maximizer/satisficer continuum.”
She describes herself now as a satisficer when it comes to money, with a bias for “simple, low-maintenance solutions.” Maximizing portfolios takes time and not everyone is wired to do that or enjoys it, she says.
How Clients Are ‘Wired’
I asked Benz to elaborate on the maximizer versus “good enough” investor and how advisors should approach clients with this in mind. She responded in an email.
Determining "how their clients are wired on the satisficer v. maximizer continuum ... may influence the type of guidance that the advisor provides. Maximizers are apt to want their advisor to lean into investment and portfolio management and tax planning, for example,” she said. “Meanwhile, satisficers might prefer guidance in other aspects of their financial lives: whether they can retire early, for example, or how they might leave a legacy for children.”
Optimizer and satisficer clients may be best served by different types of advisor relationships or fee structures.
“If their goals and needs are more modest (i.e., they're satisficers), then paying for advice on an as-needed basis may be plenty," Benz wrote. "On the other hand, if they're maximizers, it may be well worth it to them to hire a financial advisor who provides comprehensive guidance on every aspect of their plan and does a lot of ongoing hand-holding.”
Knowing where clients land on the continuum can help advisors communicate better with clients, she added.
“Maximizers will want to know all of the gory details: assumed tax rates, expected returns for asset classes and sub-asset classes, probability of success, and so on. Satisficers will want less information but more reassurance that they'll ‘be alright.’”
Changing the Vocabulary
Bob Porter, founder and president of Porter Investments, agreed that it’s important for advisors to figure out which investor type a client is.
“I approach them the same until the prospect articulates a tendency through answering questions,” he said in an email.
Determining a client’s category “will change your vocabulary when you talk about investment options and trade-offs. With maximizers, you will tend to be more exact or precise in your terms, whereas you will tend to be more approximate with satisficers,” he explained.
“Clients will let you know how involved they want to be in managing their portfolio," Lucas Wennersten, owner and founder of 49th Parallel Wealth Management, told me in an email. "Some clients ask good questions and come prepared while others act less interested. I am happy to dive deeper, but I try to keep it simpler for those who just want a 30,000-foot view.”
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