Client-Centric Risk Profiling with Technology

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In today’s compliance environment there is a tremendous amount of dynamics. The fight between SEC and FINRA has many implications behind it as well as the continuous discovery and reaction to the Madoff scandal. With the SEC taking most of the blame (I do not know why since in my opinion FINRA had just as much responsibility), the rules are getting tougher and the typical adviser and their clients are caught in the crossfire. I always feel that the best way to ensure that an adviser can adapt is to have a process with supporting technology to automate the regulation. 

One such area that I find requires more structure and automation is understanding the client. Many advisers start with a conversation, plug in information into a financial planning product and produce a conclusion. Many also continue on to manage the client’s assets. Client risk is something that every adviser should consider in greater detail. Especially today when the regulators and clients are looking to blame anyone they can for their investment performance. 

There is a lot that goes into a risk profile, but the one item that is hard to measure is emotions. I suggest every adviser take into account a client’s emotions in their questionnaire. You can certainly create you own methodology in Excel. But if you want to use an already built tool, look at FinaMetrica. It is a risk profiling software that takes into account many different metrics in the profile. They’ve made a real science out of risk profiling. After I answered the questionnaire, I was surprised I was more conservative than I thought. If the client feels that their risk profile is too conservative, make a note in the Investment Policy Statement that the client decided to override their output. You will of course need to create investment models based on the risk profile which should be part of the Investment Policy Statement.

With an off-the-shelf product, many vendors have decided to work together. For instance FinaMetrica integrates into MoneyGuidePro, a financial planning software. With a standardized product an adviser can create a standard and efficient process, and client reviews become more substantive. Having a process in place may not mean that everyone in the firm is following the process, so periodically do an audit on the process. One a quarter is great, but at least once every six months. 

Technology can be a scary thing for many, but if you use it as a regulation tool I often find that regulators are either impressed and leave you alone or they are confused and leave you alone. 

ash-bhatnagarAsh Bhatnagar, CFP®
RIA Independence Co.
Princeton, N.J.

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