Riskalyze - Do you know your risk number?
Riskalyze at BWA:
Compliance approval 1-788001 10/31/2018
We will be sending out emails in advance of our meetings as well. They will look like this:
Once you have your own Risk Number then it is time to compare it to your existing investments. Your LPL accounts are already linked to Riskalyze.
**2019 improvements to Riskalyze**
In this example the client's current investments have a higher risk number than their own self-assessed risk number and higher than the proposed portfolio so they probably would want to reduce their RN from 64 to 56 to eliminate the excess exposure to market declines. The Retirement Map is new and 76% probability is good. Additionally the system checks in with clients 4 times per year (Quarterly) to show them the good and bad of their current portfolio as well as to prompt a self-assessment. We hope that clients will update their risk number every 12-18 months.
Logging in other accounts takes 2-5 minutes depending on how many outside accounts you have.
You will need your user ID's and passwords. The login process is quick and your Risk Number will pop up and you can print it. We will also be able to review with you at your next service meeting.
What is Riskalyze?
Riskalyze is a tool that helps us as advisors identify the risks our clients are exposed to within their portfolios. They use risk numbers to gauge the amount of risk a fund is taking.
The risk number is scaled from 1-99 and is a measurement of potential loss. The higher the number the higher the chance for loss. The Riskalyze team created an algorithm to better understand the scale of risk between funds, one of the variables is Standard Deviation. Standard Deviation is a measurement of volatility in a fund, the higher the standard deviation the more volatile and higher potential of loss. To better understand the importance of volatility, it is vital for a client to identify their risk profile. A conservative investor will have lower volatility in their portfolio compared to an aggressive investor.
The following pictures provide examples of the relationship between standard deviation and the risk score.
Here is what we look for when we review people's current investments: (Investments that they have with us and/or investments they have at other companies.)
In this example, the client has not completed the risk assessment tool. We would walk the client thru the assessment and recommend updating it every 12-18 months. The tool is only 4 questions and is focused on the attitudes of clients toward loss.
In this example, the client's risk tolerance is well below their existing investments and a "Review is Recommended". Additionally, the client's 401k at an outside firm had an even higher risk number:
so it also needed to be reviewed and reallocated to reduce exposure to any market declines.
In this example, the client's portfolio is taking less risk than their assessment and they may want to shift portfolios to a higher risk to be in alignment with their risk assessment.
In the last example the client's attitudes toward risk and their investments are on target. This would be the goal for all clients regardless of what their Risk Number is. We just want them to be "In Alignment" with their own Risk Number.
Conservative (1-29) - Target 23
A conservative fund should land between 1-29. The risk score is calculated based on the standard deviation and overall volatility of the fund. As a conservative fund it has a relatively low volatility compared to the market which has a risk score of 78. The expected return for a conservative fund would typically be lower than funds with higher risk scores.
Moderate-Conservative (25-46) - Target 38
As shown in the example below: this fund has a risk score of 26 (Mod-Conservative).
Moderate (39-60) - Target 51
A Moderate fund should land between 39-60. As shown in the example below: this fund has a risk score of 47. The risk score is calculated based on the standard deviation and overall volatility of the fund. A moderate fund would be considered to have middle of the road volatility, where as its not too conservative or risky. The expected rate of return should be higher than a conservative fund but lower than an aggressive fund.
Moderate-Aggressive (54-76) - Target 65
As shown in the example below: this fund has a risk score of 72 (Mod-Aggressive).
Aggressive (66-99) - Target 75
An aggressive fund should land between 66-99. As shown in the example below: this fund has a risk score of 91. The risk score is calculated based on the standard deviation and overall volatility of the fund. An aggressive fund would be considered to have high volatility compared to the market, with the expected higher volatility there is also an expectation of higher returns.
**Click the picture above for a much more detailed explanation of the Heatmap.**
Keep in mind that Riskalyze is mostly concerned with the weighted average potential downside risk of portfolios and helping clients understand this is their primary goal.