Built on the academic framework ( Prospect Theory) that won the Nobel Prize for Economics in 2002, Riskalyze is used by fiduciaries to pinpoint investor risk tolerance and engineer portfolio risk. Fiduciaries integrate Riskalyze into the investment selection and review process in addition to helping facilitate scheduled investment and ("plan") review meetings.
Portfolio Design and Management: ERISA Section 404(c) requires a plan to provide at least three materially different (think diversified) investment choices — and Riskalyze can help.
Riskalyze's rich portfolio analysis tools provide the foundation of analyzing and monitoring the plan's investment options. Riskalyze incorporates internal investment management fees, dividends, volatility, and other risk and return data for review purposes. Advisors and fiduciaries are empowered by the Risk/Reward Heatmap, Stress Test and Risk Number features.
- The Risk/Reward Heatmap feature (powered by the return, volatility and correlation matrix) can easily uncover the potential risk, potential return and potential diversification characteristics of investment options. Analyzing, managing and monitoring plan investment choices is also easily presented to advisors, trustees and plan participants through simple reports and visual aids.
- In addition, Riskalyze provides the ability for fiduciaries to "stress test" various investments and portfolios for a wide variety of scenarios. For example, an investment or portfolio can be "stress tested" for interest rate risk via the Interest Rate Stress Test feature. The same can be done for simulating a stock market correction or crash. The incorporation of such insights into the investment review process is enlightening.
- Fiduciaries can also quickly identify the risk in an investment or portfolio by noting the Risk Number generated by Riskalyze. A "Risk Number" ranges from 1-99; the higher the number, the higher the risk.
A fiduciary can easily confirm the diversification of plan investments choices using various Riskalyze features, such as the ones listed above.
Know Your Customer — Suitability and Education: Advisors and plan trustees use the Risk Questionnaire to empower plan participants to choose a suitable portfolio. The Risk Questionnaire educates plan participants about their personal risk tolerance and sets risk/return expectations. In addition, the questionnaire can also be used to highlight the differences in the investment choices offered by the plan.
The Risk Questionnaire is 100% quantitative and math-driven so as to remove subjectivity of weighting the score. Fiduciaries are divorced from the Risk Questionnaire's process and results.
For pooled plans, the Risk Questionnaire can be used by plan trustees and advisors to identify the plan's risk profile and portfolio objective. At the conclusion of the Risk Questionnaire, all responsible parties will be presented with suitability information for discussion and documentation purposes.