How would you sum up what you do as a financial advisor?

To me, it's as simple as "we help people make smart choices with their money".

One of the biggest values we bring to our clients is being a sort of “big mistake insurance”. We help lessen the chance that they're going to make a bad decision with their money at the wrong time. And we all know that most of the bad mistakes our clients make are usually due to emotional reasons over logical ones. We act on behalf of our clients to essentially protect them from themselves.

But when are client's emotions at their highest? Most likely it’s when there’s some sort of market volatility happening or the media is reporting on the most recent “apocalypse”. 

Easing Client’s Fears

Over the past 4 years, we’ve discovered that one tool has helped more than any other in our attempt mitigate irrational behavior and prepare our clients for what to expect when it comes to their investments.

Because of this tool, we have fewer clients freaking out during the most recent market worries or when other unplanned events happen.

Introducing Riskalyze

Riskalyze is a Risk Alignment Platform created to help advisors and clients understand and prepare for the investment risk within their accounts.

It helps explain risk in a way that virtually can’t be misunderstood by both the client and the advisor.

In the past, we’ve used questionnaires and discussions to try and find our clients risk tolerance. The problem we faced when doing this was that a client’s risk can change dramatically depending on what’s happening in the markets that day. For example, our clients had a much lower risk tolerance in 2009 compared to their higher tolerance for risk in 2007.

One way Riskalyze prepares for this issue is by showing your client the actual dollar amount of fluctuation rather than just the % gain or loss. This helps clients better understand the real effect of the risk in their portfolio.

They take a 2-minute quiz on their computer or phone and they end up with one number between 1-99. 1 equals no risk.

Combining Client and Portfolio Risk Into One

If you gave a client’s risk tolerance to 10 different advisors to construct a portfolio, the outcome would most likely be 10 different portfolios. This is because risk and portfolio construction can be highly subjective.

The way that Riskalyze reduces the subjectivity is by both finding the client’s risk number and also finding the comparative risk of their portfolio. Both  are displayed as a number between 1-100. 

This helps the client align their own risk tolerance with that of their portfolio risk so that they can be comfortable with it. Displaying it as a number helps them easily understand the risk they want to have vs the risk they are actually taking.

The Retirement Roadmap

Riskalyze offers an easy to understand roadmap to help clients quickly understand whether they are on track to achieve their goals or not.

When you show them the Roadmap they get an idea of how much risk they are taking and how much they should be based on their goals. This tool helps those conservative clients understand that they usually can't be invested like a Risk #1 if they want any chance to achieve their goals. 

In our Discovery Meetings with prospects, using Riskalyze in this way has greatly increased the value they receive and makes it much more likely that they become our clients. When they see how we can take their complex financial life and simplify it in a way that they can understand, they want more of it.

Using Riskalyze has greatly increased the number of prospects who become clients at our firm.

How it Works

When a portfolio is uploaded into Riskalyze, it immediately analyzes the historical performance of each of the individual holdings and aggregates all the technical numbers we love to geek out on. ie; standard deviation, alpha, beta, Sharpe ratio, etc.  It then converts the complex technical data into a single number between 1-99. 1= no market risk. Seeing one number gives client instant clarity to how much risk they are taking.

Riskalyze is able to analyze every publicly-traded stock, mutual fund and ETF out there. It’s also able to analyze thousands of third-party money managers as well as REITs and some other non-traded alternative investments.

The result is a projection of the probable returns of a portfolio within a range of returns.Not only % but $ amounts. That’s big for the client.

Riskalyze gives you and the client a range of returns to expect over the next 6 months, within a 95% statistical probability. This allows the client to easily find out how comfortable they are with the expected ups and downs for their portfolio.

The client can also see the risk number of each individual fund or stock.

You'll also get a long-term range of returns based on historical performance, the fund expense ratios, and expected dividend payout.

Best and Worst Case Scenarios

This shows the clients how much their portfolio would lose in a major correction as well as how much they would've gained in a recent good market year.

Riskalyze vs Morningstar

Maybe it’s not right to compare these two softwares due to the fact that they are vastly different. They have completely different purposes and we use them in different ways in our practice. But the reason I bring this up is because we used to show Morningstar X-rays to our clients or prospects when proposing an allocation or having a review meeting. After we started using Riskalyze, we only use Morningstar behind the scenes while we are creating the portfolio and we rarely show Morningstar reports to clients anymore.

Why? Because Riskalyze is so much easier to understand and explain to clients. It’s also much easier to create and edit portfolios on the fly. Morningstar is still incredibly valuable to our firm, it’s just that Riskalyze wins the client facing award. Morningstar Advisor actually named them as having the best client-facing technology in the business.

The Cons of Riskalyze

Riskalyze assumes that the long-term future returns posted by the market will mirror the returns of the past. This can make the potential annual return that they project for the portfolios look pretty optimistic. This may not be a negative for some advisors, but for us, we project pretty conservative returns for our clients when looking over the next 30 years.

It's not an in-depth planning software like e-Money, Money Guide Pro, etc. The retirement roadmap is really most beneficial for those Discovery meetings with prospects to help them get a feel for long term planning and view in a way that's easy to understand.

Bottom Line

Riskalyze is worth a test if you’d like to do these two things;

1. Easily understand your client's risk tolerance, be able to explain to them what to expect in their portfolios, and make sure they are comfortable with the risk of the investments they own.
2. Have a valuable deliverable to attract prospects in your first meeting with them.

We found that one of the biggest advantages Riskalyze has is that it creates a sense of urgency in the prospects we meet who discover the amount of risk they are taking in their portfolio is far different than what they expected. This is a prime opportunity to present a portfolio that's more in line with their risk number. 

As you can tell, I like talking about this, so if you have questions about if Riskalyze could work you, send me an email at [email protected] with the subject line: “Riskalyze Test”.

-Dave Zoller, CFP®