BlackRock is putting greater focus on making the super-computing power that drives its asset and risk management business available to financial advisors. 

BlackRock’s Aladdin risk management platform, which helps manage about 7 percent of the world’s wealth, is increasingly used by financial advisors, says Woo Fung Kwong, managing director and head of Aladdin Risk for Wealth Management, the branch of BlackRock Solutions responsible for delivering Aladdin’s risk analytics to financial advisors.

“We’re seeing a shift away from the brokerage commission-based transaction models and more into a fee-based advisory model,” says Kwong. “We wanted to bring Aladdin into this space to work with financial advisors, and I think we’ve been able to accomplish that over the past few years.”

Aladdin, which stands for Asset, Liability, Debt and Derivative Investment Network, is at its core a risk analysis system that it has used internally and with institutional clients to help them stress-test portfolios. Kwong is responsible for bringing portions of the platform to financial advisors. He describes Aladdin as an operating system that links investment managers with a massive amount of information to help manage money in real time.

BlackRock manages $5.1 trillion, all of which is handled directly by or with the assistance of Aladdin. For more than a decade, institutions have also accessed the platform. Over the past several years, BlackRock has pursued advisors and retail investors as well. Aladdin is available to advisors through the Aladdin Risk for Wealth Managers division, launched last summer, and to retail investors through BlackRock’s FutureAdvisor robo-advisor.

“We’re excited to take the abilities of Aladdin directly to financial advisors to help them to think about how they analyze risk and to decide when and if they want to make changes in a portfolio,” says Kwong. “Aladdin will help them determine what are the potential tradeoffs in risk and return that they might have to take.”

Aladdin’s functionality and output are so specific and detailed that they were difficult for smaller wealth managers to employ previously. Big data powers the system—information from governments, credit monitors, Fannie Mae and Freddie Mac, social media and satellites paint a vivid, real-time picture of the economy.

Kwong says that around 10,000 advisors have used Aladdin in the past two years.

“We’ve been working with financial advisors on portfolio analysis and portfolio restructuring,” says Kwong. “Our goal is not to touch all 300,000 U.S.-based financial advisors all at once. Our goal is to focus on those who are acting within the portfolio.”

Aladdin Risk, a subset of the Aladdin platform available on a standalone basis, combines the platform’s risk analytics and processing capabilities with BlackRock’s subject matter expertise to offer advisors a comprehensive risk solution, the company says.

Aladdin Risk gives advisors access to Aladdin’s risk data in investment exposures, performance attribution, ex ante risk, asset allocation and compliance. In addition to portfolio and security level risk analytics, advisors can also access portfolio and attribution reports, asset allocation analysis, security valuation, cash flow projections and compliance tools.

“Using Aladdin can be very complicated and mathematical, but the idea of risk is no different from trying to explain drivers of return of your portfolio’s performance,” says Kwong. “People intuitively know what these things are, but they may not be able to measure and employ them.”

All told, nearly 30,000 people use the platform to manage about $17 trillion of the world’s assets, according to BlackRock, conducting 250,000 trades and running billions of hypothetical scenarios each day.

Aladdin’s beginnings lie in a humble Sun Microsystems workstation nestled in 1988 between the refrigerator and coffee machine in BlackRock’s one-room Manhattan Office. The system was first used to track risk in the mortgaged-backed securities space before being expanded to other assets. During the global financial crisis, governments turned to Aladdin to evaluate the toxic assets responsible for the housing bubble.

“These were the same tools used to help the New York Federal Reserve and Bear Stearns to hedge their portfolios,” says Kwong. “They are highly sophisticated. We had to change the way we presented that information for the advisor audience.”

Most of Aladdin’s work now takes place at a data center in Washington state, where a number of inputs are stored, including historical events, weather patterns, political scenarios and the rise and collapse of financial markets.

Clients like Deutsche Bank, JPMorgan Chase, Prudential and CalPERS have used Aladdin to perform millions of Monte Carlo simulations on thousands of investments.

Aladdin’s machine learning capabilites can read news stories, broker reports, email and other documents to create a view of investor and consumer sentiment towards investment. Aladdin can also screen social media feeds for information about events or investments.

Through “collective intelligence,” Aladdin is augmenting its knowledge by user-imputed content and investments, absorbing more potential scenarios and historical case studies as it evolves, according to BlackRock.

“Aladdin is basically a risk engine for analyzing portfolios,” says Kwong. “iRetire comes with a portfolio that’s supposed to generate an outcome in retirement income. In Future Advisor, a set of questions is used to deploy a portfolio for a clients’ objectives and goals, with Aladdin analyzing all of that. These outputs are being produced by Aladdin, but the users don’t actually touch the tool.”

Incorporating BlackRock’s risk models and analytics with a tremendous amount of computing power, Aladdin can track multiple risks on a universe of investment positions through any scenario across asset classes and geographies.

Aladdin can show advisors the potential impact of inflation, shifting commodities prices, regional recessions and political events to help plan for changes across the world.

“We’re also working with home offices to provide them with risk management assistance on their entire enterprise,” says Kwong.  “When you think about the total numbers of accounts, there are millions of them out there, that require scale and sophistication that only Aladdin can provide.”

Aladdin’s accounting and investment management offerings can act as the investment infrastructure for an entire advisory practice, like a digital CIO for the firm. The tool can be adapted to take a smaller role to support a human investment management workforce. Aladdin Risk can be deployed to help manage client portfolios and to measure risk within the portfolios of third-party managers.

Aladdin can model large and very complex portfolios, supporting investment decisions across asset classes, according to BlackRock. For investment managers, Aladdin allows seamless one-click rebalancing against the market or custom benchmarks across thousands of investments.

“There are advisors that want to use Aladdin because of the way risks can be interacting within the portfolios,” says Kwong. “They could end up with more risk than expected. There are ways to mitigate certain kinds of risk like interest rates or foreign exchange. Aladdin works as a confirmation, an eye-opener to the risk that exists, and it allows advisors to take steps to address that.”

Aladdin also includes trading tools. The transparency provided can help investment managers save hours of time that might otherwise be spent attempting to reconcile data between disconnected systems, according to BlackRock.

Data flows faster as time moves on, so more sophisticated workflows and higher-powered technology are necessary to parse the sheer volume of knowledge available to investors today. Aladdin cannot only accept a deluge of information in real time basis, but its algorithms can parse that information to make it meaningful and useable for investors, the company says.

Aladdin and Aladdin Risk are made available to advisors and institutions at a range of price points, depending on the level of access required, according to BlackRock.

“We’re working with advisors in iRetire to translate a dollar amount of investments into a value, into what that means in terms of a sustainable retirement income based on the investor’s age,” says Kwong.

Despite the sophisticated, high-powered computing, Kwong says that Aladdin is meant to augment, not replace, the human influence within investment decisions.

“There is a lack of trust (in the financial industry) following the 2008 crisis,” says Kwong. “Just having the financial models and tools that provide transparency and insight into the kind of risk that people are taking ... will allow some of that trust to be regained over time.”