Thousands of advisors whose broker-dealers use the Envestnet proposal generation and investment platform are also passionate Nitrogen users. So, what’s the easiest way to map Nitrogen's Risk Number to an Envestnet Investment Objective? Check out our research below.
IN THIS ARTICLE:
- The Nitrogen Approach to Assessing Investment Risk
- The Traditional Approach to Assessing Investment Risk
- What’s the difference?
- Mapping Investment Objectives to the Risk Number
The Nitrogen Approach to Assessing Investment Risk
The Risk Number is a proprietary scaled index that has been validated in the market for over a decade, and tens of thousands of advisors have turned it into the number one instrument used to address risk with clients. It has become a staple measurement of a client’s risk tolerance and risk capacity, but its real power lies within its ability to pinpoint investment risk on the same 1-99 scale.
When it comes to investments, the Risk Number is designed to reflect the risk of a portfolio, model, account, or individual security. It sits at the heart of our analytics engine that advisors use to make the right decisions and empower clients to invest fearlessly.
We built Nitrogen from the security level up.
We developed Nitrogen the hard way — by using security-level risk assessment as the building blocks for analysis. Our analytics engine recalculates risk at the security level every single night based upon actual price history of a holding (no liquid market price? See what goes into calculating something like a non-traded REIT). We analyze both the volatility of that price history and the correlations across multiple securities. Find more at nitrogenwealth.com/methodology.
The Traditional Approach to Assessing Investment Risk
Traditional investment risk assessment — like what is in use at Envestnet today — takes a similar approach to analyzing historical investment data, but with slightly different inputs.
Instead of running analytics at the individual holding level, securities are grouped by asset class with the belief that securities within an asset class will likely behave similarly from a downside risk perspective.
Source: Risk Scoring on the Envestnet Platform (PDF) EN-RSEP-0321 obtained 4/12/22
What’s the difference?
Outputs of both approaches are similar in that they arrive at a standard-deviation-based quantification of risk, they’re just articulated differently. A traditional five point or seven point scale uses labels like “Moderate Diversified” or “Aggressive Growth,” whereas Nitrogen assigns a number on a one-hundred-point scale. More on these scales and how they map to Risk Numbers below.
Inputs differ in that one uses real price history at the individual security level and the other relies on traditional asset-class-level modeling.
Mapping Investment Objectives to the Risk Number
Illustrated below are Envestnet’s five point and seven point scales, and what the math says about how Risk Number ranges are best aligned to investment objective ranges.
5 POINT SCALE
7 POINT SCALE