I had an interesting and surprising conversation with a couple of advisers at today’s Vanguard investment symposium

They all said that younger clients (roughly under 35)  are very risk adverse (we speculated that this was down to the 2008 crash). So, according their risk profile these youngsters should only have about a 25% allocation to equity.

The problem is this allocation is not high enough. It’s the equity allocation that earns you the returns you need to accumulate wealth. And you need to do that while you are young, so that you can take advantage of the impact of compounding and have a long enough time frame to ride out the peaks and troughs of the equity market. Then as you near retirement, you can reduce your exposure to equities and increase your allocation to less volatile, fixed income assets

So, how to deal with this conundrum? These younger clients are genuinely risk adverse, but this may lead them into investment decisions that have long term, negative impacts.

Personally, I think it is down to the advisers to educate these clients. Teach them about compounding, help them understand the relationship between risk and return, show them how diversification can mitigate equity volatility and coach them to be disciplined and stay the course.

The problems with this?

Well, firstly its not easy for the adviser, it takes time and effort.

Secondly, there are tail risks for the adviser – what if during the next crash the client that was ‘educated’ claims to have been ‘mis-sold’? How sympathetically will the regulator view what the adviser did then?

You couldn’t blame an adviser for taking the path of least resistance, following what the risk profile suggested and then spending their time on more lucrative older clients.

And were only talking about the small proportion of under 35s who both want advice and can afford it here. I wonder what the rest of them are doing?

Is there an advice gap opening up between the young and old?

Dan