Future of Investing
How Riskalyze CEO, Aaron Klein is giving investors permission to ignore short-term risk

Riskalyze works with investment advisors on assessing their clients' true tolerance for risk and aligning their portfolios appropriately. The technology platform works with thousands of advisors to help manage over $120 billion in assets -- at its core is its proprietary measure of risk, the Risk Number.
Riskalyze founder and CEO, Aaron Klein joins Tradestreaming to talk about how his firm's approach to helping advisors understand risk better is changing the way they manage to their clients' short- and long-term goals.
Riskalyze CEO, Aaron Klein[/caption]
There have basically been three waves of advice. The first wave was “my mutual fund is better than that guy’s mutual fund.” The second wave was “well, we’ve established my mutual fund isn’t better, but instead of talking performance, let’s focus on your long term financial goals instead.”
We think the third wave is risk-first. If we can align a client with the portfolio that fits their Risk Number, we can empower that human to give themselves the permission to ignore short-term risk, stay invested for the long term and actually achieve those long term financial goals.
The Risk Number is a quantitative, objective measurement of how much risk clients want. Advisors will often come aboard and say “wow, my clients seem to want more/less risk than I think they should have.” Well, great. That’s why they’re paying you to be their advisor — to lead them to the right decision. But at least now you know what they want, and you can build a portfolio that aligns with what they want, and if you believe they’re off base, show them why they should instead take the amount of risk they need. That creates “fearless investors” — and that’s what we need if investors are going to achieve their long term goals in the face of their human instinct to react to short-term risk.
What's one of the biggest challenges investors have managing their portfolios? What's one of the biggest challenges investment advisors have in managing client investments?
Keeping clients invested for the long run, and not allowing short-term risk to sabotage their performance. [caption id="attachment_5510" align="alignright" width="145"]
Are investors generally managing too much risk in their portfolios?
A team of academics just went through our methodology and data, and what they found was fascinating. 52% of investors aged 20-29 don’t fit their stereotype of being aggressive. This is the client who is emotional and upset when markets are dropping because they have too much risk. Meanwhile, 53% of investors aged 70-79 don’t fit their stereotype of being conservative. This is the client who is frustrated that they aren’t getting the returns they want when markets are going up. It turns out, people are individuals. They have Risk Numbers. And we ignore their Risk Numbers as a part of the investing equation at our own peril.How did advisors (pre-Riskalyze) address risk management? How are they doing it differently now that you guys are around?
First, they’d start with stereotypical risk capacity. Young, aggressive. Old, conservative. Then they’d ask some nonsensical subjective questions like “do you get a thrill out of investing” and nudge the client to the right or left a little bit with each question. Well, guess what? People got a real thrill out of investing in 2013 and didn’t get quite as big of a thrill in 2008. That’s not risk tolerance — it’s market outlook. They’d take that combination of stereotype and market outlook and toss the client into a buckets like conservative, moderate or aggressive. Then they’d match them with a portfolio carrying the same label by an asset manager who means different things by those words. This is the equivalent of me sitting down with my architect and contractor and deciding I want a “moderately conservative hallway leading to my moderately aggressive bedroom.” We haven’t decided anything. The Risk Number puts the feet and inches into this industry.What's the Risk Number?
