Hortz: Why do you feel so strongly about changing client risk measurement into a more data driven approach versus just client questionnaires? What do you see as the future of this area?
Shumbres: There is a lot of data out there on everyone, even if they’re not an Internet user. Think about it. If you have a bank account, mortgage, loan, credit card or iPhone—all of these products are collecting data. Totum Risk now gathers this data through population analytics, which provides enough information to assess someone’s risk tolerance without them having to take a long questionnaire.
Can you imagine an advisor receiving an alert that a client’s risk score has changed and why? How about already having the framework of a prospect’s risk tolerance before you even meet with them? With a data driven approach, I know an advisor can have up-to-date information that will help them invest their client’s money with a stronger more precise client risk measurement.
Hortz: How exactly are you further evolving your risk measurement tool?
Shumbres: Instead of asking more questions, we determined and incorporated over 100 variables based on a person’s life events that would impact the risk capacity score by more than 5%. As we pull in data, if one of the data points triggers a variable, then the advisor will be alerted of the life event and the risk capacity score will be updated. As we continue to gather this data, we will be able to show the advisor risk trends and be able to share with them how a client’s risk scores compare to a peer with the same income, zip code, or sector they work in. This adds a tremendous amount of value and backup for advisor compliance around Know Your Customer and suitability issues.
Hortz: What best advice do you have for advisors about the key decisions they may need to make about client risk tolerance measurement and management?
Shumbres: Many advisors believe that they already know their clients well and do not need risk tools or they are already using a risk questionnaire, but haven’t re-evaluated how risk scores are actually calculated, and the accuracy and value they bring to their client relationships. With a growing market risk environment and the increased use of big data and digital technology, it is going to become hard to defend against the inevitable wave of lawsuits that will likely come from clients or their heirs if a limited risk management process or an inaccurate risk tool was used as part of their investment strategy...especially because the SEC now requires it.
The most strategic way for advisors to protect their business, reputation and client portfolios is to assess their current risk tolerance tool. Focus on facts over feelings (risk capacity over just risk preference), multi-scoring over a one-dimensional approach, ease and accuracy of gathering information and how the scores are calculated. It’s imperative for advisors to also have a plan on how to monitor changes in client life events that will affect their investment strategy.
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