Today, we were pleased to issue this joint press release with one of our key independent broker-dealer partners, NEXT Financial in Houston.
HOUSTON—Independent broker-dealer NEXT Financial Group Inc. (NEXT), has partnered with Riskalyze to bring the benefits of advanced risk analysis to the firm’s more than 800 financial representatives.
Riskalyze, a technology company specializing in risk calculation analytics for financial advisors, was founded in 2011. The company’s patented Risk Number™ technology allows advisors to quantitatively capture a customer’s risk tolerance, align portfolios with their expectations and scientifically quantify the suitability of investments for customer tolerance.
"Our partnership with Riskalyze is yet another example of how we’re equipping our representatives to be leaders in the industry," said Barry Knight, president of NEXT. "Everything we do at NEXT empowers our advisors to be more effective at delivering the advice their customers need."
NEXT is one of the first major independent broker-dealer partners working with Riskalyze to equip their advisor network with this ground-breaking technology. With drag-and-drop portfolio integration between Riskalyze and NEXT’s custodial platform, the firm’s advisors can instantly realign portfolios to fit individual customer needs.
"We’re incredibly excited about the opportunity to work with the team at NEXT Financial," said Riskalyze CEO, Aaron Klein. "Their vision for the industry, for their advisors, and above all else, for their commitment to client service is refreshing and inspiring."
Riskalyze is the company that invented the Risk Number™, the first-ever quantitative way to capture client risk tolerance, align portfolios to client expectations, and quantify the suitability of investments. Riskalyze works with RIAs, hybrid advisors, independent broker-dealers, RIA networks, custodians, clearing firms and asset managers to align the world’s investments with investor risk tolerance.
NEXT Financial Group Inc., Member FINRA/SIPC, is a broker-dealer based in Houston, Texas, serving the needs of financial services representatives throughout the country. The company prides itself in helping business owners enjoy success and financial independence. The company was founded in 1999, and is currently led by President Barry Knight. More information about the company can be found online at www.nextfinancial.com. Securities and investment advisory services provided by NEXT Financial Group Inc. Member FINRA/SIPC. NEXT is located at 2500 Wilcrest Drive, Suite 620, Houston, Texas 77042, 1-877-876-6398.
One of our advisors shared the story of how she used Riskalyze to convince a “silver bug” to stop adding to his position in the precious metal. This client’s Risk Number was a 45, meaning that he could tolerate a 9% drop in his portfolio within a six month time period.
The advisor knew that adding more silver to the client’s portfolio would drastically change the risk in the portfolio, but the client kept saying that he knew it was “a sure thing.” So the advisor used the Six Month Probability Range and the Risk/Reward Heatmap to educate the client.
The client’s existing portfolio already carried a Risk Number of 48.
The advisor duplicated the portfolio and built a new target portfolio to show the client exactly what moving another 10% of his holdings into silver would do to the risk in the portfolio.
Sure enough, the portfolio’s Risk Number would escalate 10 points to a 58, and the downside risk would escalate from 9% to 12%, which was definitely outside of the client’s risk tolerance.
With the ability to visualize this additional risk, the client understood why even the upside of more silver wasn’t the right fit for his overall financial situation, and agreed to hold off on any changes for now.
Ultimately, clients will do what clients will do, but Riskalyze is empowering advisors to quantify and demonstrate the effects — helping clients to understand exactly why they’re making a recommendation or advising for or against a course of action.
By Michael McDaniel, Chief Investment Officer
I’ve used Riskalyze in my practice long enough to have witnessed some surprising results from client risk questionnaires. I’ve had 80 year olds with extremely high risk numbers and 30-somethings with almost no tolerance for risk.
One of the things I’ve had to realize is that I’m often seeing a client’s real risk tolerance for the first time. Our industry has trained us to assume that age is the primary driver of how we invest money, so we tend to stereotype clients and group them into their respective decades.
The reality is, risk tolerance is much more about finding an individual client’s threshold for pain, so we can stay within it, and avoid the “buy high, sell low” cycle that has robbed average investors of about three quarters of the returns they should have captured over the last two decades.
In other words, people don’t always fit into the nice little boxes stereotypes would have us believe.
When a risk questionnaire’s results surprise me, I use it as a reason to start a discussion with the client. One of the first things to do is confirm that they used a meaningful investment amount, and that their devastation amount was truly devastating and not just an “acceptable loss.” (To get accurate data out of a Riskalyze risk questionnaire, we have to have an accurate starting point.)
Assuming the client did base the questionnaire on real dollar amounts, the discussion is paramount. For those with low risk tolerance and hefty financial goals, a reality check may be in order. “Mrs. Jones, to have a chance at hitting your retirement goals, we’re going to need to get you comfortable with a bit more risk.” Or “Mrs. Jones, we can stay within this risk tolerance, but that means you need to save more every month, or expect less income in retirement.”
For those with a higher risk tolerance than their finances require, a different discussion is warranted. “Mrs. Johnston, I know you can stomach this much risk, but you have put yourself in a financial position where you don’t need to.” Or “Mrs. Johnston, I know you can handle a high level of risk, but we’re already on track with a conservative approach.”
I use the questionnaire to get the discussion moving, and focus the rest of the conversation on the portfolio’s projected performance range. “Given your objectives and your risk tolerance, here is the portfolio I recommend. Six months from today, this portfolio has a 95% chance of ending up between…”
Bottom line: understand that you may be seeing a client’s true risk tolerance for the first time. And use surprising answers as a catalyst to drive those important conversations with clients, and a reminder of how important your role is as their risk manager.
Quantifying the risk in portfolios involves a complicated set of mathematical and methodology choices that we are always working to improve for our advisors. Today, we rolled out several adjustments to our methodology to enhance the performance of two key features — portfolio analytics and interest rate stress testing.
First, we made an adjustment to how we account for dividends in a portfolio. We now add dividends into expected return for each security after normalizing returns for the long term, to avoid the washout of dividend effects for low-beta investments.
For portfolios with high dividend-yielding funds or stocks, advisors will likely see a reduction of 2 to 4 points in the portfolio’s risk number. The largest drop we’ve seen — generally when portfolios are filled with low-beta, high-dividend investments — was 9 points on the Risk Number scale.
This is an exciting improvement that we believe will be even more accurate in showcasing the value advisors place on dividend yield in client portfolios.
Second, we made an adjustment to how we stress test portfolios for interest rate risk. We now use the last six months of returns to correlate the sensitivity of each individual security to that period’s movements in the ten year treasury rate.
Because we’re using tighter data points for interest rate stress testing, this improvement will increase the relevancy of the interest rate stress test for actively managed funds, the style drift of active managers and younger funds with less history. It will also more quickly reflect changes to Fed policy or movement in interest rates.
These two changes are a part of our constant efforts to make Riskalyze more effective for our advisors. If you have any questions about these adjustments, don’t hesitate to let us know. We love being a small part of your success!
Many LPL teams are fans of the Model Wealth Portfolio platform of actively managed funds that LPL provides to their advisors. Today, we’re excited to announce that we’ve made it incredibly simple and easy to evaluate and use MWP funds on Riskalyze.
Every MWP fund fits within one of five benchmarks that LPL has established. We’ve created custom symbols to reflect those benchmarks, so you can easily add them to your model portfolios, or target portfolios that you build for clients.
The five custom symbols are:
- #MWPICP — MWP Capital Preservation Benchmark
- #MWPIMG — MWP Income with Moderate Growth Benchmark
- #MWPGI — MWP Growth and Income Benchmark
- #MWPG — MWP Growth Benchmark
- #MWPAG — MWP Aggressive Growth Benchmark
You can simply add these symbols to your existing models, and allocate part of the model to them, or advisors who use MWP exclusively can simply create five models, with 100% of the portfolio in each respective benchmark.
Once one of your prospects has completed the risk questionnaire, Riskalyze will quantify the suitability of each MWP benchmark for that specific client.
Once you’ve invested the client’s assets in the MWP platform, all of the individual holdings are reflected on the asset screen. You can use our LPL-compatible drag-and-drop portfolio integration to recheck portfolio alignment during your next client review.
We’re excited about the opportunity this creates for our LPL teams who love using the Model Wealth Portfolio platform. There is more to come as we continue to empower advisors to use risk to win new clients, capture and meet expectations and quantify suitability.
If you want to see this in action, join a guided tour at Riskalyze.com.