Investors are fearful of change in volatile and difficult times; status quo is easy. Here’s how top-tier advisors guide their investors through it all.
IN THIS ARTICLE
This guide is for advisors who want to improve their process to serve their clients more effectively. We'll cover how advisors use Riskalyze to build and fine-tune portfolios to up their game—model and client portfolios alike.
To begin, advisors import several existing portfolios into Riskalyze for analysis, highlighting insights into their portfolio construction method. Looking at the existing through a new lens rekindles ideas and satisfaction in the process. The results are clear: top producers use the Riskalyze lens to stay ahead of the curve.To get a jumpstart on the math behind Riskalyze, see our Calculating the Historical Range guide.
The Risk Number and 95% Historical Range
The Six Month 95% Historical Range gives you the information you need to carefully act on serving your client. Are they going to be more focused on the upside or downside? What value adds can I create for them?
Determining a Client's Desired Risk Number
To find a client's Risk Number, advisors balance the Risk Assessment with the client’s needs derived from their goals. Advisors can use a combination of:
- Finding their Risk Number via a Risk Questionnaire or Risk Targets.
- Using Retirement Maps to determine how much risk is needed.
Constrain and Construct
Advisors often wrestle with questions such as what portfolio constraints, such as minimum equity exposure, do we need? Do we need to set aside any cash? Are there any tax implications I need to think through, such as realized gains?Most advisors review portfolios at the household level. This grants the flexibility of navigating a 401(k) account with limited options. Overall, they achieve their objective: diversification at the household level—rather than the account level—that fits the client's Risk Number and long-term goals.
Some advisors will customize the portfolio for each client; others will start from a base recipe and mix it up depending on the client; others use a set range of model portfolios. Whatever your firm’s strategy, Riskalyze is flexible for these and more.
If you already have a portfolio outside of Riskalyze, you can get started through a few options, such as the spreadsheet importer.
Other advisors start from scratch and, as part of their vetting process, run securities through Riskalyze to find the best of the breed. A popular option is to select similar asset securities (i.e., US large-cap growth funds) and drop them into the Optimizer to filter the top 2-3 securities.
After coming up with several favorite funds and securities, they construct a few draft models with their best ideas, effectively creating a sandbox to experiment with new and different ideas.
With this, advisors build portfolios that are defined, suitable, and presentable.
Review, Rebalance, and Recalibrate
At this point, we know where the client wants to go, where the goalposts are and have constructed strong, durable accounts.
During a periodic review, advisors often run through a checklist similar to below:
- Are our current investments still top of the line? Should we make any changes to the allocations?
- Is there a more efficient portfolio that we can construct?
- What accounts do we need to rebalance and how can we use the models in Riskalyze to ensure we're within the Risk Number range?
Everyone is different as most firms often review their portfolios on a monthly, quarterly, or semi-annual basis. In that review they run through a series of questions:
- Vetting new funds: have I run them through Riskalyze? Have I examined them through the Optimizer and the Stress Tests?
- Alignment: are my portfolios aligned with their original intent? Do I need to make any adjustments?
- Rebalancing: do I need to rebalance my portfolios?
- Diversification: does the portfolio retain sufficient diversification?
- Goal-oriented: is the portfolio sufficient to achieve the long term goals of clients?
Thus far we've laid out the path for managing portfolios; now it's time to highlight the means and methods.
Advanced Risk Modeling
With Advanced Risk Modeling, advisors stress test portfolios under various scenarios, by adjusting the outlook of the S&P 500 and 10 Year Treasury. Thorough reviews significantly enhance portfolios for advisors by creating a rock-solid portfolio, capable of enduring various market elements.
Similar to Advanced Risk Modeling, quickly flipping on the Stress Tests is a quick and straightforward way to double-check to ensure you’re on the path to success. Whether watching the downside of equities or bonds, or assessing the potential for gain in an up market, Stress Tests help advisors quickly address the burning question: "how will my portfolio perform in ______ scenario?"
The Risk/Reward Heatmap assists advisors and investors uncover correlations and relationships within a portfolio.
By viewing the portfolio through a correlations lens, we get a deeper understanding of the diversification within the portfolio; we see the whole is greater than the sum of its parts. How diversified is my portfolio? Are these allocations sufficient? Run in tandem with Stress Tests, this is a very powerful duo. Advisors can quickly see how well-diversified their prospect's portfolio is—is their mix of assets sufficient for their goals?
The Optimizer is an excellent way to arrive at the most efficient account. Whether you want to see what the top 2-3 holdings are, or add in some constraints for a broader portfolio, the Optimizer serves advisors as a great start to confidently building the strongest portfolio.
Dividends and Expenses
Dividend Yield and Expense Ratios are helpful indicators to advisors to deliver helpful feedback in the portfolio building.
Looking to build a strong, low-risk portfolio with resilience in a rising interest rate environment? Perhaps dividends are the way to go. This is the way to confirm a sufficient Risk Number and dividend plan.
The Risk/Return Scenario opens the advisor-client discussions to broader topics. Dive deeper into the return and standard deviation calculations. Use the extra information when deliberating the next step in the vetting process.
Flexibility is provided through making small tweaks to the portfolio while looking at the underlying analytics—change the holding’s percentage to increase/decrease risk/return exposure.
These are simply a few options; we see advisors every day applying Riskalyze in innovative and creative means. Find the method that works for you to delight and satisfy your clients.