“We were stunned to find that advisors were using three, four, or five different products to do this,” Cone says. “One to calculate risk, one to research investments and one for asset allocation. They were trying to make these different programs fit together. We’ve tried to boil these sophisticated tools down to one easy-to-look-at application with a straight-forward output.”
Where determining a client’s risk tolerance is concerned, Totum overturns one assumption immediately: Instead of asking what a client would do in the case of a 10 or 20 percent correction, the platform asks at which level of losses would the client panic — 20 percent? Thirty percent? — and allows advisors to adjust the program’s assumptions accordingly.
“It’s more visceral than hypothetical,” Zhang says. “We end up with two different risk tolerances, their hardwired tolerance and their measured risk capacity.”
Totum is a technological answer for what common sense says should be true – an obese 55-year-old might not want to plan with a 40-year time horizon, while a healthy 60-year-old might need to, thus the platform considers a client’s body mass index.
“If a client prefers to be a conservative investor, but their risk capacity is aggressive, that allows the advisor to have a dialogue with the client,” Zhang says. “The client still makes their own decision, but now they can understand these different impacts in a holistic manner.”
Zhang says that the more sophisticated risk and investment management tools will allow human advisors to differentiate themselves from digital disruptors. Since the variables and algorithms tend to be more involved than the average do-it-yourself investor might tolerate, Zhang believes that robos will opt for simpler models rather than matching or exceeding Totum’s level of sophistication.
“These are things that we think advisors should be delivering to help build and make adjustments to portfolios that robos are nowhere near to providing,” Zhang says. “Robos are using a simpler model because they want to attract and process as many clients as possible. The consumer market in general doesn’t care about sophisticated analytics.”
For portfolio allocation, the application calculates the impact of new investment proposals instantly, allowing advisors and their clients to quickly compare results across different market scenarios. Proposals can be compared against current or hypothetical portfolios for cumulative return, total return, maximum drawdown, standard deviation, yield, estimated income, equity beta and risk-adjusted return.
The graphical interface also breaks down portfolio assets by sector and class to allow advisors to see where a portfolio’s risk exposure and returns are generated. Investment proposals can be adjusted for different levels of risk tolerance in real time.
“These are the kinds of numbers advisors focus on to tell compelling stories about clients’ investments,” Zhang says. “We wanted to make it flexible for the advisor to see without having to crunch the numbers.”