RiskPro agrees with industry voices like the Nerds at Team Kitces about traditional risk tolerance measures being flawed. Michael Kitces has been sounding that alarm for a number of years (ThinkAdvisor by Jeff Berman).
A truly accurate risk analysis must not only measure an investor's willingness and ability to tolerate risk, but capacity as well. Even with all three of these important elements checked off, perception and expectations can still cause a problem if not fully understood and addressed by the advisor and client together.
RiskPro was built because financial firms use a variety of different tools for gathering essential investor information, like risk tolerance. Using helpful tools is totally fine if you have a way to translate the results into a singular, universal language understood by all.
When onboarding and managing a new client, the crucial thread of investor tolerance data has to remain clear and unbroken throughout the process:
- Find the Accurate investor Risk Budget
- Communicate and Document
- Build a Suitable and Aligned portfolio(s)
- Monitor Daily for Risk Tolerance Breaches
If investors, advisors, portfolio managers and financial firms have different interpretations of risk tolerance, or of the investment risk of a portfolio, then portfolio alignment will not likely match up, leading to a possible domino effect of miscommunication. Even if everything aligns, how are you tracking client tolerances lining up with portfolios accurately?
Adding a pinpointed Risk Budget and a measurement of portfolio risk to a data-fed conversation of aspirations and goals gives an advisor a much more accurate translation of tolerance; one that can be passed along without fear of misinterpretation because of it’s clarity.
Set the right expectations and monitor daily with RiskPro.
Disclosure: RiskPro® is an investment risk profiling and portfolio construction, and surveillance software as a service platform developed by ProTools, LLC (“ProTools”). ProTools is a technology company headquartered in Newport Beach, CA. RiskPro is a risk analysis tool that provides information only and not intended to provide investment advice. For more information, visit www.riskproadvisor.com