Validation Amid a Crisis
The outbreak the COVID-19 virus rocked the global economy and financial markets. Understandably, fear and panic spread among millions of investors. Through it all, RiskPro® performed impeccably.
From the time that RiskPro was originally envisioned and designed, Nick Scalzo was committed to aligning and collaborating with the best minds in the industry. He formed the unique ProTools, LLC team that was then comprised of his firm partners, financial advisors, CFAs, and econometricians.
The team worked diligently at creating a software system to calibrate an investment risk profiling questionnaire to a volatility scale that could match an investor’s ability and willingness to tolerate risk by accurately pinpointing their gain/loss threshold over any 12-month period interval. To align a portfolio to their threshold, we used data sets consisting of historical daily returns over both 12-month and 30-year time frames. The math behind the algorithm was based on revealing possible outcomes in an investor in an extreme “2008-type market condition”. The algorithm was first developed by Josh Emanuel, CFA® who is currently a CIO and Managing Director of Wilshire Associates, and then tested and validated by mathematicians led by the Professor and Chair of the Department of Mathematics, California State University Fullerton, Dr. Alfonzo Agnew. This third-party independent review used historical statistical analysis, together with a theoretical normal distribution model. The historical study resulted in RiskPro showing a 98.4% level of accuracy. Even more promising, the forward-looking, theoretical likelihood of a RiskPro generated portfolio not exceeding its loss threshold in any 12-month given period resulted in a 98.6% accuracy rate.
All the hard work put into RiskPro’s development, set its users up for great success in the biggest test that was yet to come following a 10-year bull market run in the U.S. financial markets. The unforeseen global pandemic scenario, still unfolding before us, is the real-life test currently presenting itself.
We used this extreme market volatility to do a deep dive and evaluate the maximum stated risk tolerances of 78 institutional strategist model portfolios available on the RiskPro platform. Over the 12-month period ending March 23, 2020 (Q1 market bottom), only three of the 78 models breeched their stated threshold, and this was only by an average of a 1.33%. These findings served as additional validation of RiskPro’s cutting-edge technology, and exciting for the ProTools Team. Firms utilizing the system have improved investor confidence and suitability, as well as advisor/client experiences for stronger and more successful investment and business relationships.
When investment professionals utilize RiskPro, they can document and display investment portfolio account values for any given, forward looking, 12-month interval in the market (existing and proposed client accounts). This allows advisors to build and propose suitable model portfolios with projected results shown in not just percentages, but in simple dollar terms that any investor can easily understand.
We regularly reach out to advisors and firms across the nation incorporating RiskPro into their daily practice for feedback (seen below as advisor case studies). This is important as we share their experiences with our development team for continuous user experience updates and partner integrations.
Advisor Case #1: Advisor Doug incorporates RiskPro into every new client intake and review. One of his clients was retiring last year, so together, they reviewed the Personal Risk Budget TM. In doing so, the client decided to reduce risk. When Doug spoke with the client in mid-March as the market was melting down due to COVID-19, the account was down in market value, but still well within the client’s original stated tolerance range. The client thanked Doug for reaching out and helping him understand where the portfolio risk was coming from. Doug gave him additional choices of suitable options, allowing him to feel even more comfortable with his personal choices. He then surprised Doug by asking him to invest an additional $100k.
Advisor Case #2: Advisor Brian was speaking with an acquaintance that had a million-dollar account with another advisor. This gentleman told Brian that he was perfectly satisfied with his existing advisor. Brian asked about the risk of the portfolio. The gentleman assured Brian that it was relatively conservative (although he was not able to quantify the risk). Brian suggested a quick risk analysis using RiskPro. When Brian illustrated the risk revealed and pinpointed by RiskPro, the client was stunned and immediately asked Brian to become his financial advisor. In Brian’s words - “That’s all I had to do to win the business!”
Hearing success stories never gets old to our team at ProTools, as they affirm what we already know to be true: Advisors are growing business with RiskPro. Additionally, when risk is revealed, clearly displayed, and monitored on an ongoing basis, Perpetual Suitability™ happens organically.
RiskPro’s Perpetual Suitability provides a documented methodology for regulators, and an overall better relationship experience for
back offices, compliance departments, portfolio managers, advisors, and most importantly, the investor.
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Disclosure: RiskPro® is an investment risk profiling, portfolio construction, and surveillance software as a service platform developed by ProTools, LLC (“ProTools”). ProTools is a technology company headquar-tered in Newport Beach, CA. RiskPro is a risk analysis tool that provides information only and not intended to provide investment advice. Tolerance is maximum anticipated gain or loss in investment value over any 365 day period within a reasonable statistical probability. For more information, visit www.riskproadvisor.com