A discussion of different types of clients provides managers with insights regarding characteristics and tendencies that may not come out in the interview process. Perhaps the most difficult aspect of the questionnaire and interview process is correctly identifying the client s risk profile. Leslie Kiefer explains how client perceptions of risk are often emotional, not rational, and thus are often misunderstood. Emotions can affect both client expectations and decisions in a variety of ways. For example, consider, as Kiefer does, the issue of tax sensitivity versus risk tolerance.
Some clients are more averse to paying capital gains taxes than holding volatile assets.
For them, the risk of seeing their asset base decrease because of volatility is more tolerable than the certainty of decreasing the asset base to pay capital gains taxes. Given the incredible recent volatility of the technology sector, the issue of diversifying a highly concentrated portfolio has come to the forefront not only for managers but also for clients and potential clients who have seen their wealth rise and fall with the Nasdaq. Many of today s wealthy clients are wealthy in only one dimension employer stock. Once a manager successfully explains the role of diversification, the manager must evaluate the employer stock to determine the risk it holds for the portfolio. As Stein points out, some stocks may contribute significantly less volatility than others.