If you think about someone with high wealth and also having high standard of living risk it would seem highly improbable. High wealth would typically mean the person has enough wealth to make standard of living risk a nonissue. If standard of living risk was actually in fact high then relatively speaking their wealth level must not really be that high in comparison. That being said if this situation would occur you would likely moderate & adapt.
Any time there are cognitive biases I would imagine moderate because why wouldn’t you? They are easier to overcome unlike emotional biases so why be lazy and not try and educate the client solely because they have a low standard of living risk doesn’t really make sense to me!
In Reading 8 of CFA text, under 5.2.1. Case Study #1: Mr. Renaldo, the guy has high wealth and low SLR, so adapt.
The MVO recommends 60 stock / 30 bonds / 10 cash.
According to the text, using behaviorally modified asset allocation, it should be 70 stock / 20 bonds / 10 cash.
The text says to adapt is to use an even more aggressive approach so that the client can live with it. Also, the client should reduce his concentrate stock holding by 50%.
So the right thing to do is to reduce the concentrated position (I get that), but to prevent the client from going bananas, I ask him to buy other stocks to bring his allocation to stocks to an even higher 70% of the portfolio?
Is this how adaptation works? Thanks in advance ppl.
good news is the exam makers wouldn’t mess with you like that.
Keroppi I think the curriculum’s main point there is to simply try to get the person closer to IDEAL without sweating that it’s 10% higher in equity allocation than a true MVO allocation. I.E. I would bet you $50 if you look back, the starting point of the portfolio with the concentrated position is > 70% equities
