Bob Veres, a renowned thought leader in wealth management, compares popular risk tolerance products including Andes Wealth Technologies, Riskalyze, Finametrica, TotumRisk and more.
“Bear markets beget portfolio losses, unhappy clients and, sadly, lawsuits against advisors. If you relied on any of the popular risk tolerance products to construct that portfolio, here’s how you are likely to fare under the careful scrutiny of an arbitrator,” Bob wrote.
Here is an excerpt from the article:
‘Andes Wealth is a brand new program that, like Riskalyze, is not exclusively a client risk tolerance assessment instrument. Andes Wealth … is a portfolio analysis tool with a risk tolerance component built into the front end.
The risk tolerance assessment process that Andes Wealth uses is simplicity itself: It shows bar charts, each graphically illustrating potential returns versus downside risk, based on a normal distribution around an expected return for different portfolio mixes. (You can insert your own expected returns, but if you do, you need a way to defend them; the defaults are based on more-easily-defended historical returns.) In all cases, of course, the green bar showing potential returns is higher than the red bar is low.
Once the client chooses a portfolio, looking at different time periods, the system evaluates his or her current portfolio and identifies how to move that current portfolio to the efficient frontier at the point the client chose. There is no 1-99 scale here; the client has chosen a portfolio and gets what he or she asked for.
Andes Wealth is the only program in this survey that maps a client to a place on the efficient frontier; the theory being that a risk tolerance instrument might assess a client as a “53” on the 1-99 scale, and then provide a “53” portfolio that might be undiversified or otherwise inefficient. The program lets you show in a colorful graph the return profile of the portfolio compared to the ever-shifting efficient frontier over any time period, allowing clients to see where they are versus the most efficient version of their risk profile over the past six months or one, two or five years and so forth – so the program becomes an ongoing instrument to spur dialogue and provide explanation in the face of extreme market conditions.
The program also offers a robust investment policy statement generator, which might catch the interest of advisors who once relied on IPS AdvisorPro before the Broadridge acquisition of Fi360.
How would you answer a plaintiff’s attorney who was curious about the academic justification of the Andes Wealth assessment? Yang says that the answer is pretty simple: There’s a lot of research on the distributions of risk and return. The client has signed off on one such distribution, with the knowledge that 20% of the time a portfolio might fall somewhere outside of that expected band of returns, either on the upside or the downside. You have their signature and hundreds of studies on the distribution of asset class returns over long and short time periods.
My “defensibility in arbitration” score for Andes Wealth: B+.’
Watch this mini demo video of our Risk Tolerance Test.
Andes Wealth Technologies, Riskalyze and Totum Risk were named the finalists for the 2020 WealthManagement.com Industry Award.
Click here for the full article. Riskalyze got a C in “defensibility in arbitration”.
