In Short
In addition to objective measures of risks as I mentioned earlier, there is also an emotional side to risk, which is how much fluctuation a person can mentally handle within their portfolio.
My Sensitivity Analysis
Whenever I meet with current or perspective clients; it is very important for me to find their current attitude towards risk. That is accomplished by giving them a test. I ask them what is their reaction if their account loses 10% of its value, 20%, 30%, etc. I then listen to what they say and watch their reaction. Some people freak out if their account loses 10% of its value; other people are calm when their account loses 50% of its value. Based on their objective needs and their emotional risk tolerance I can craft a portfolio that’s best for them.
The Effect of Fixed Income Securities
I put fixed income securities (such as bonds) into a portfolio to reduce the magnitude of the fluctuations. Think of the ballast in a boat, which reduces how much the boat is thrown around by the waves. By manipulating the percentage of fixed income securities in a portfolio I can control the risk. In 2008, the stock market dropped by 50%. A 50% bond and 50% stock portfolio would have dropped by only 25% (the bond part isn’t moved by the stock market). Using their risk tolerance I can craft a portfolio for them that has a maximum drawdown that is within their tolerable limits.
Conclusion
While reducing risk will reduce the potential returns of the portfolio, I think the most important thing is for the client to be comfortable.
Fee Structure
| Rate | Assets Under Management |
| 1.44% | Below $125,000 |
| 1.00% | Between $125,000 and $750,000 |
| .85% | Between $750,000 and $1,250,000 |
| .80% | Between $1,250,000 and $1,750,000 |
| .75% | Between $1,750,000 and $2,500,000 |
| .70% | Between $2,500,000 and $3,250,000 |
| .65% | Between $3,250,000 and $4,250,000 |
| .60% | Above $4,250,000 |
A single rate is applied to the entire account. So a person with a $750,000.01 account pays less than a person with a $750,000 account. I will waive personal tax return fees for accounts over $1 million. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.
As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. If you would like to submit a post to my blog, please contact me.
If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.
E-Book Download
Questions for the comments
Did my explanation make sense? Do you agree or disagree with what I said?
