At Riskalyze, our mission is to align the world's investments with each investor's Risk Number.
Why is this important? The data shows that most people are invested outside of their tolerance. When the market inevitably pulls back, they sell out, lock in significant losses, and wait until the market “feels safe” to buy back in at the high. We believe this poses the greatest threat to individual wealth, and we’re empowering advisors to end that cycle.
But as you know, even though Riskalyze is the first company to apply a purely quantitative approach to risk tolerance, there are a variety of qualitative questionnaires and approaches using psychometric or other data. So many advisors often ask, "What is the difference?" and "Why is Riskalyze better?"
Qualitative Risk Tolerances
There are a lot of great strengths in qualitative data. Even our own questionnaire asks a few qualitative questions, like changes in financial status or investment goals (though those answers don’t affect the resulting risk fingerprint). And in fact, qualitative questionnaires, as developed by ISI, Finametrica, and Morningstar, are fine tools that provide interesting data.
But the reality is, qualitative questionnaires introduce a huge amount of subjectivity into the process, and can rarely connect an investor to a personalized asset allocation with any sense of high-level accuracy. By their nature, the qualitative approach is only as good as the people (or the team of psychologists) hired to weight the questionnaire’s various answers into a final solution.
When pressed, the proponents of qualitative risk tolerance will admit that one can’t really know how to weight qualitative answers, so they recommend asking a large quantity of questions, equally weighting the answers, and hoping the results average out to be accurate.
(Which is about as effective as equally weighting the allocations in a portfolio and hoping those results average out to be accurate! Risk simply doesn’t work that way.)
The Quantitative Approach
On the other hand, our unique and patented Risk Number technology is a purely quantitative approach, built on the academic framework that won the Nobel Prize for Economics in 2002. We remove all of that subjectivity and let the math speak for itself, both in the classification of the investor and the construction of their portfolio allocation. The result is a far more rigorous measurement of the client’s risk tolerance, which stands a far greater likelihood of strengthening the advisor’s case in any arbitration or lawsuit that might occur.
As a side note, the quantitative approach appears to be far easier for the client. Because the mental structure of the questions doesn’t change – just the numbers do – our advisors have found that it’s a far simpler questionnaire for clients to tackle.
PRO TIP: Want to learn how investing is broken? We believe there is something wrong with investing today, and there is a better path toward fearless investing. To learn more, check out our interactive Riskalyze Academy Lesson, Investing is Broken.