Ditch Your Advisor If They’re Not Using This Tool

Riskalyze is a finance tool you should ask your advisor to use when he/she gives you investment advice.(GaudiLab/Shutterstock)

If you have met with a financial advisor, and upon concluding the meeting felt things were a bit “cookie-cutter,” you are not alone. Many advisors, particularly when it comes to risk tolerance, have a proclivity to stereotype clients based on their age. Follow-up questions often lead to classifying risk tolerance in very overused and oversimplified terms like “conservative,” “aggressive,” and “moderately aggressive.”

Formulating an investment plan based on a conversation with an investor and their current market sentiment is highly subjective. The results will often reflect that. A good financial advisor needs to take the subjectiveness out of the equation. Providing investors with a quantifiable measuring tool for their risk analysis, which can be used to produce tangible results, is a must for any advisor. Say hello to Riskalyze.

What Is Riskalyze

Riskalyze provides advisors with a streamlined and tangible way to measure risk tolerance. The service was founded on the belief that any investor’s risk tolerance can be quantified in a single number, which allows advisors to create a portfolio that matches the investor.

If you were to give a client’s risk tolerance to a dozen different advisors, the result would likely yield a dozen different portfolios. The simple act of assessing risk in the first place can be highly subjective, and constructing a portfolio is even more so. Riskalyze reduces any subjectivity by finding a client’s exact risk number and then assessing the comparative risk of their current portfolio. Both numbers are displayed in a range of 1–99: the higher the number, the higher the risk.

Why Risk Matters

Returns are often the focus when discussing investments. But savvy investors know that the how is just as important as the end result. There are innumerable investing strategies. And there will never be a shortage of edgy advisors and investors who believe that their strategy is the panacea for anyone looking to make a profit. Regardless of what stock or index proves  lucrative, the type of investments an individual chooses, and the amount they invest, always comes down to one thing: risk tolerance.

Risk tolerance has a wide variety of influential factors. One of the most important is age. While an older individual may have more money to invest due to more years of investing and compound interest, they may be at the end of their accumulation phase, and thus unwilling to roll the dice on something potentially volatile. Younger individuals still have decades before retirement, and can afford to recoup any losses incurred from more volatile risks.

Reasons for risk tolerance can be circumstantial as well. A 25-year-old working professional may have seen his entire 401(k) wiped out in 2008 and subsequently became highly risk-averse. An individual’s risk tolerance can be a constant in their life, or it can be something that is very fickle. Regardless of how much it does or does not change, determining risk tolerance is a solid foundation when building a portfolio.

How Does Riskalyze Work?

Riskalyze starts with a quiz, which should take less than five minutes. Upon completing this quiz, the individual is given a number that reflects their risk.

Displaying a client’s risk tolerance as a number allows them to see their risk tolerance, compared to the risk they are actually taking. For example, if a client’s risk number is 34, but their current portfolio’s risk number is 68, they will need to temper their portfolio with more conservative investments to reflect their current risk tolerance.

When the advisor uploads the client’s current portfolio to Riskalyze, it begins an analysis of the portfolio, examining the historical performance of each individual holding. It then dissects all of the data and assigns a risk number between 1 and 99. Riskalyze assesses every publicly-traded stock, exchange-traded fund, and mutual fund. It also analyzes thousands of third-party money managers and real estate investment trusts.

The analyzed data is then turned into a projection of what the probable returns of the uploaded portfolio will be, along with a range of expected returns over the next six months. This range, with a 95 percent statistical probability, is given in both percentages and monetary amounts.

With so much analyzed data being put into quantifiable numbers, it is hard for subjective errors to be made based on the advisor stereotyping clients by age and presumed risk tolerance.

Riskalyze also allows advisors to perform a stress test on their client’s portfolios. They are allowed to simulate a wide range of scenarios, such as a market crash or a hike in interest rates. This allows clients to outline all of their contingencies and see where they are vulnerable.

The Award-Winning Math

 The concept of Riskalyze is fantastic, but how is it possible, and is the math correct? Riskalyze is the world’s first Risk Alignment Platform. The platform was built on the framework known as “Prospect Theory,”  which won the 2002 Nobel Prize for Economics.

Prospect Theory analyzes how individuals assess probabilities involving risk, where the probability outcomes are known. Using this framework, Riskalyze has been able to determine an individual’s risk number with nearly 96 percent accuracy.

Why It Matters

As of 2021, nearly 40 percent of Americans used a financial advisor, and this number only continues to climb. In other words, many Americans are placing everything from retirement accounts to money market accounts in someone else’s care.

With this comes the assumption that their advisors understand their needs and expectations. After all, an investment timeline often spans several decades. Within these decades, many changes are likely to occur, along with shifts in risk tolerance and attitudes towards money. Numbers are objective, and advisors should be objective as well, when evaluating a client’s risk.

While the Riskalyze platform is not going to tell you which stocks to invest in so you can become a millionaire, it will mitigate unnecessary speculation and subjectiveness when determining your risk profile.

Many firms and investment advisors have adopted Riskalyze (you must be a registered advisor or affiliated with an accredited institution in order to use the software).  Yet many advisors still assess client risk the old-fashioned way. Monotonous questionnaires with limited answers were perhaps once the best way for advisors to evaluate a client’s risk and build their portfolio, but the future is here.

Remember that you are not married to your advisor. They work for you. Your advisor should have your best interests in mind, and use every tool available to better serve you. After all, if you were in the market for a new doctor, you would want them to be up to date with new technology and information, as opposed to someone who still uses leeches for bloodletting.

Ask your advisor about Riskalyze. Do they use this tool? If not, why not? Their answer and actions after this conversation, may help clarify whether they have your best interests in mind.

The Epoch Times Copyright © 2022 The views and opinions expressed are only those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.