Every week at Tradestreaming, we’re tracking and analyzing the top trends impacting the finance industry. The following is a list of important things going on we think are worth paying attention to. For more in depth trendfollowing, subscribe to Tradestreaming’s weekly newsletter (published every Sunday).
1. Banks increasingly moving in on the pureplay marketplace lenders (Tradestreaming)
While the marketplace lenders like Lending Club and Prosper are putting competitive pressure on traditional banks, the incumbents are responding in time, with the help of firms like LendKey, which provide the electronic platforms to banks to conduct online lending.
2. Stock markets increasingly interested in blockchain technology (CoinDesk)
A group of banks, exchanges and clearing houses has formed a working body to discuss how blockchain tech might be used in settlement.
3. Fidelity not renewing its partnership with roboadvisor, Betterment (RIABiz)
While both parties touted this relationship between old and new, it appears Fidelity is close to launching its own version of an automated advisory platform that it’s built in house.
4. MIT launches its first graduate fintech course (paymentweek)
The Massachusetts Institute of Technology, one of the most prestigious universities in the world, is launching the first graduate level financial technology course in the United States. “Throughout the course’s seven weeks, students will explore different sub-industries within the FinTech space, including consumer finance, payments, etc.” Where do we register?
5. How Riskalyze’s Aaron Klein is giving investors permission to ignore short-term risk (Tradestreaming)
“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.” Riskalyze helps advisors manage portfolio risk for $121 billion in assets.
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.
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.
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.
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?
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.
So, an advisor has analyzed a client portfolio and a Risk Number generated — how can you help the client-advisor relationship at that point?
Well, if it’s a prospective client, the advisor can often demonstrate to the client that they have way more risk than they realize or want. That’s a powerful tool for acquiring clients. And for existing clients, it’s a way to “get real” and drive alignment between the risk the client has, wants and needs. As we say, “show prospects they’re invested wrong, prove to clients they’re invested right.”
Can you give a real life example of how an advisor/client has used your system?
One of our advisors captured his own Risk Number. He was a 52. Plugged in his own portfolio and it was a 51. (He rightfully felt pretty proud of that!) Then he plugged in his client portfolios which spanned from 45 to 65. Then he started capturing client Risk Numbers and they spanned from the 20s to the 80s.
It didn’t take him long to see the pattern. He was really good at figuring out which clients were more conservative than his 52, and which ones were more aggressive than his 52. But he was anchoring them to HIS Risk Number. He said “now I know why my conservative clients still feel scared and my aggressive clients still feel frustrated.” He was able to tell them he’s using new technology to measure their risk with greater precision, and now he’s got each of his clients aligned to themselves.
Can you give us a progress report on the business? How many people work for Riskalyze? How many advisors are on the platform and how many assets are you tracking?
We have 90 employees (we call them Riskalyzers) serving thousands of advisors managing over $121 billion in assets on the platform. We’re thrilled to be working with advisors and wealth management enterprises across the industry to help them drive risk alignment, and at the same time, drive huge efficiency in their business. Our Autopilot digital advice platform is taking the Riskalyze process and flipping it to be client-driven, often advisor-assisted. And our Compliance Cloud platform is helping enterprises sift through their books of business for compliance issues.
From your vantage point, how is the advisor’s role changing in the business?
Everything feels different, but the reality is, everything is the same. Here’s what I mean: the press can’t help but print any story that has the word “robo” in the headline. I swear, one day we’re going to have an article about Merrill Lynch allowing their advisors to use iPads and the headline will say “Robo tablets arrive at the thundering herd.”
Here’s the truth: you still have advice businesses, and you have self-directed businesses. Wealthfront and Betterment are self-directed robos. They’re just self-directed brokerage accounts with way better user interface. Meanwhile, Personal Capital and Vanguard Advisor Services are advice businesses, not robos. They’ve hired armies of CFPs and leverage great technology to support a high client-to-advisor ratio.
In five years, there will be a plethora of digital advice platforms, because the diversity of thousands of advisory business models and approaches won’t go away, and our different advisor-facing technology needs to become more client-facing. We’re going to offer Autopilot there, but we’re also going to work with partners because our mission isn’t “bringing the world’s assets onto our digital advice platform,” it’s “aligning the world’s investments with each investor’s Risk Number.” And we’re not going to rest until we achieve that because it changes the world for the better.
Risk is such a hard thing to define for investors. Simple questionnaires advisors use don’t capture our real risk. Get risk wrong and the portfolio is wrong — sometimes with disastrous results.
Today’s guest on Tradestreaming Radio aims to change all that. Aaron Klein’s firm, Riskalyze has developed its own unique way of making a risk assessment that really captures what he calls, an investor’s risk fingerprint.
Instead of relying upon simple, pat, theoretical questions, Riskalyze really tries to determine how investors make decisions under uncertainty.
With a proper risk assessment in hand, the opportunities are endless for Riskalyze to develop a truly personalized portfolio.