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Can New Portfolio-Risk Tools Improve Client Results – Or Win New Business?

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Can New Portfolio-Risk Tools Improve Client Results – Or Win New Business?

July 26, 2016

by Bob Veres

New portfolio-risk tools have been created specifically to integrate with FinaMetrica and map a client’s risk tolerance with an actual (and revised) portfolio. I looked at two such tools to see if they can help advisors improve client results – or if they can help win new business. Here’s what I found out.

The FinaMetrica risk profiling tool is the gold standard for evaluating the risk tolerance of your clients – the only one on the market that is justified by academic psychometric research and peer-reviewed studies. Its goal has always been not to dictate what portfolio you create for clients, but to start a good conversation about how clients feel about downside risk, and at what point they’re liable to sabotage their financial future by bailing on a long-term investment policy at the wrong time.

Nevertheless, advisors have been asking for a quick, convenient way to map the FinaMetrica risk score to a particular portfolio – for two reasons. They’d like guidance on how to revise a prospect’s (or client’s) current holdings to more closely match the client’s ability to tolerate downside volatility. And they’d like a way to evaluate portfolios and see how appropriately they (or their advisors) are managing their assets in light of their tolerance for downside volatility.

The requests have been answered with two new products that help translate a person’s FinaMetrica score, from 1-100, directly into specific portfolios using the advisor’s own buy list. Both will translate current portfolios into risk scores that match the FinaMetrica grading system. And both offer very powerful portfolio-building tools that make it relatively easy to modify a client’s holdings not only to match his/her risk tolerance, but also to create a more stable, durable, efficient mix of assets using your overall buy list.

Interestingly, the two products take different approaches to the same problem.

RiXtrema: Downside scenario learning

Let’s start with RiXtrema, which has been building out its FinaMetrica integration since late last year. RiXtrema is constructed around some of the most sophisticated scenario tools you’re likely to find anywhere, which start with the spectrum of future scenarios themselves. (See an assessment of the RiXtrema product here and the ensuing APViewpoint conversation here.)

“The scenarios come from our advisory board, which includes hedge fund managers and people responsible for managing multi-billion dollar pension portfolios,” says RiXtrema president Daniel Satchkov. “They, and our institutional customers, tell us the potential economic situations that they’re most interested in preparing for, and we make that intelligence available through the product as a form of high-level crowdsourcing.”

Once the institutional portfolio managers have identified the scariest and most interesting possible future scenarios, the company’s quants, using proprietary algorithms, evaluate how each scenario would impact hundreds of different factors. Then they explore how the changes in those factors would impact each of many thousands of different investments.

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New Portfolio-Risk Tools

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