Human Capital: The Major Asset (and Invisible Risk) in Your Client's Investment Portfolio
While conventional wisdom views a career as a stable bond, human capital carries unique risks that mean a client's job shouldn't always be treated as a safe asset.
If you thought of your client's career as an investment, what would it be? Would it be safe, like a bond? Or risky, like a stock?
Conventional wisdom says a person's career is more like a bond. The rationale is simple: Most people receive a relatively stable paycheck, so their career income has low volatility.
From there, the traditional advice follows that younger people can afford to take more risk in their investment portfolios and then gradually reduce their equity exposure as they approach retirement.
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The logic sounds reasonable as a rule of thumb. The problem is that it's disconnected from how careers actually work. For starters, volatility and risk are not the same thing.
What can go wrong with a career?
Think about some of the risks embedded in human capital:
- Job loss. Career income is illiquid. You can sell a bond whenever you want, but you have to work to get paid. Even a temporary disruption to income can create a cash crunch.
- Disability. This is an obvious risk for certain professions, such as professional athletes, but an unexpected health event can leave anyone temporarily or permanently unable to work.
- Death. For someone with dependents, this raises a very practical question: What happens to my spouse or children if my income disappears?
- Displacement. This risk is particularly relevant in the age of AI. It's anyone's best guess which jobs and industries will be disrupted over the next decade.
- Professional liability. Doctors, lawyers, accountants, executives and others may have substantial career risk tied to litigation or professional mistakes.
- Skill. Career success isn't guaranteed. You may be a CEO spending as though you have another 10 years of high income ahead of you, but a few bad decisions can quickly bring humility to those expectations.
- Volatility. And yes, volatility matters too. Income can fluctuate considerably for people who rely on bonuses, commissions, equity compensation or other forms of variable pay.
Are all these risks important for every client? No, every career is different, and that's a key point.
Looking only at the volatility of somebody's paycheck misses the bigger picture. Human capital isn't a "safe" income stream that we can simply drop into a Monte Carlo simulation. It is a major source of wealth with its own liquidity, concentration, personal and economic risks.
The good news: Many of these risks are manageable
Many of these problems have solutions. A reserve fund can cover expenses during a job loss, buying someone time to find the right next position instead of taking the first available paycheck. Insurance can address disability, death and professional liability risks.
The investment portfolio can also play a role. If a client works in technology and much of their future wealth already depends on the technology sector, maybe their portfolio should have less exposure to tech stocks.
The portfolio can help diversify risks that already exist elsewhere in the client's financial structure.
Of course, not every career risk can be neatly hedged. If AI displaces your job, the solution may involve retraining, changing industries or reducing spending for a period.
Professional liability insurance may cover a malpractice settlement, but it doesn't find you another job. Disability insurance can replace some income, but it generally can't re-create the full economic value of a career.
Risk management doesn't mean eliminating uncertainty. It means identifying the things that could materially affect the client and putting practical protections in place where you can.
So what type of asset is human capital?
In my view, human capital looks much more like a private business than a bond.
Start with the opportunity. For most people, their career is one of the most important engines for wealth creation. Outside of the ultra-wealthy (and even many of those families originally created their wealth through somebody's career or business), human capital is often responsible for producing the majority of lifetime wealth.
Then consider the risks. Like a private business, human capital is:
- Illiquid. You have to work to realize its value. You can't sell 20% of your career tomorrow because you need cash.
- Concentrated. Your eggs are largely in one basket. An injury can end an athlete's career just as a professional mistake can materially impair the career of a doctor, lawyer or executive.
- Non-tradeable. You can't exchange careers with somebody else. If your profession becomes obsolete and you need to retrain, you may be starting over.
- Uncertain. You own both the upside and downside of your future earnings. The result will depend on some combination of skill, effort and luck.
Once you start thinking about human capital this way, the planning implications become more interesting. Instead of simply saying, "You're young, so you can own more stocks," an adviser can ask more useful questions:
- How resilient is this person's career?
- How accessible is their wealth?
- What happens if their income disappears?
- Is their investment portfolio doubling down on risks they already have through their job?
- What protections would allow them to take career or investment risk more confidently?
Those questions get us much closer to real risk management.
Human capital can also offset bad luck
Human capital isn't just something we need to protect. It can be an important risk management tool in itself.
Imagine someone is about to retire and the stock market suddenly falls 30%. If they're already retired, their options may be limited. They may need to cut spending or sell investments in a down market.
Someone who is still working has another lever available: Their career. They could delay retirement for a few years. They might work additional hours, pursue a higher-paying role or temporarily trade some work-life balance for additional income.
None of those choices is necessarily desirable, but having the option is valuable.
This flexibility can offset bad luck elsewhere in the financial structure, and that has implications for the portfolio. Someone with significant career flexibility may reasonably be able to tolerate more investment risk because they have another resource available if markets disappoint.
The opposite may be true for retirees, or even for younger individuals with fewer marketable skills.
Of course, the right approach depends on how human capital relates to the broader financial picture and interacts with an individual's unique risks.
Bringing human capital into the total wealth picture
Ultimately, I don't think advisers should treat human capital as a safe bond or simply as another line item in a planning projection.
It is a unique asset that creates wealth and carries risks. It can be protected with reserves, insurance and diversification. And, because careers give people the ability to adapt their future income, human capital can sometimes help absorb bad outcomes elsewhere.
That's why it belongs in the same conversation as the investment portfolio, private assets, real estate, liabilities, insurance and other components of a client's total wealth.
Advisers are in a unique position to see all those pieces together. When you understand the client's career as part of that broader financial structure, you can move beyond simplistic rules of thumb and start asking a more useful question:
What can we do to help the client navigate their key risks and maximize their wealth potential?
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