Managing client risk is probably one of the hardest tasks that most advisors face in their daily routines. When the market is falling, clients will call to ask why they’re losing money. When the markets go up, they call wanting to know why their portfolios aren’t doing as well as the major indices, or someone else’s portfolio. But there are new tools now available that advisors can use to help their clients see just how much risk they are taking or need to take. Riskalyze is a service that provides advisors and their clients with a clear picture of where they are in the risk frontier and where they need to be.
How it Works
Advisors have traditionally tried to determine their clients’ risk tolerances through the use of questionnaires and discussion that helped their prospects to quantify the amount of risk that they want to take in order to reach their goals. But the reality here is that ten different advisors could construct ten very different portfolios that each of them judges to have a given level of risk. Riskalyze goes a step further with the use of both a questionnaire and a separate tool that imports all of the client’s current portfolio holdings from each of their respective platforms. This module then analyzes the historical performance of each of those holdings using a powerful engine that aggregates all of the technical numbers in the portfolio such as standard deviation and beta and then produces a single number from 1 to 99 (with 1 having no market risk) that tells the client where they really are on the risk scale based on this information. This engine is capable of analyzing every publicly-traded stock, mutual fund and ETF in existence, about 10,000 third-party money managers as well as a plethora of non-traded alternative offerings and REITs and even custom-tailored investment offerings.
Once the analytics engine has done its work, it will project the future probable return of the portfolio within a given range of percentages. (For more, see: Tips for Assessing a Client's Risk Tolerance.) All probability ranges for the portfolio are calculated across a 95% confidence interval. For example, Riskalyze calculates that there is a 95% chance that the portfolio will remain somewhere in that range in a 6-month window. It does not break this down further into probability of gain vs loss, because if it shows that there is a 70 or 80 percent chance that the portfolio will gain money, and it loses value, that sets the client up for disappointment (and dissatisfaction with the advisor). While it can’t predict where it will fall within the range, there is a 95% statistical probability that it will fall somewhere within that range. The goal is to keep the range in a place where the client is comfortable with the outcomes, even if it does end up being a loss. The program ultimately assumes that the long-term future returns posted by the market will approximately mirror the long-term returns of the past, and also shows clients how much their portfolio would lose in a major correction as well as how much they would make in a bull market.
Advantages for Advisors
Advisors who use Riskalyze can make their practices more efficient and deal with fewer headaches from clients because they can refer to the risk statement that was produced by the program. They can tell their clients that their job is to deal with the amount and types of risk that fall within the probability range provided and make sure that the client’s portfolio is growing according. They can also show clients who call when their portfolios are down or underperforming other benchmarks in a bull market how their portfolio’s performance is normal given the amount of risk that they are taking. They can use side-by-side comparisons to show the amount of loss that they might sustain in order to achieve a given level of return. These handy numbers can quell the worries of many uneasy clients when the going gets tough. (For more, see: How Advisors Can Help Clients Stomach Volatility.)
The program also allows advisors to show clients how the addition or subtraction of specific assets will affect their risk profile, and how they may need to reposition their holdings in order to maintain their previous risk level. It should be noted that while the Riskalyze analysis can be used and printed out as an investment policy statement, this service is not a comprehensive plan in any sense. However, the information it contains can easily be imported into many commonly used financial planning programs, such as Emoney. The program also allows clients to log on remotely with the advisor so that they can seamlessly look at the data and illustrations on the same screen. Perhaps the biggest advantage that this service has to offer is the sense of urgency that it can create in prospects who discover that they are taking a great deal more risk in their portfolios than they realize. (For more, see: 5 Vital Questions Advisors Should Ask New Clients.)
The Bottom Line
Advisors can keep pace with the growing demand for advice with programs like Riskalyze. Fast Company has named Riskalyze one of the top 10 most innovative firms in the financial industry, and Morningstar Advisor listed them as having the best client-facing technology in the business. For more information on this program, visit the Riskalyze website at www.riskalyze.com. (For more, see: How to Be a Top Financial Advisor.)