Using Analytics In Wealth Management: The Good And BadAdvisor Perspectives
Part 1 – Portfolio risk measurement
This is the first part of a new series on investment analytics in the wealth management industry and how advisors are using analytics to communicate with clients and prospects. We will look at some of the more popular analytics and go over what they are, their good points, and their potential pitfalls.
Since the financial crisis, wealth advisory clients have shifted their relationships from one of blind trust to a desire to internally understand and validate that a particular advisor recommendation is the right thing to do. Advisors have obliged, taking their conversation from “trust me” to educating and partnering with their clients around their finances and future. Ironically, many advisors have reported that this education and partnership approach builds trust.
The challenge becomes how to educate clients about their finances when they may have little or no financial training. Turning to portfolio analytics may be one part of the solution. But most financial analytics are confusing for people outside of the industry. Forward-thinking advisors have been searching for and employing analytics very carefully, choosing only those metrics that are simple, understandable, and meaningful for people with no financial training. This series will explore some of these metrics, along with their benefits and pitfalls.
Today we will be looking at the important area of portfolio risk. Part 2 will focus on capital market assumptions. And part 3 will focus on Monte Carlo analysis.
Portfolio risk analytics
One of the most difficult topics to discuss with clients is risk. Unfortunately, it is also one of the most important.
For financial professionals, there is a wide array of analytics to measure and describe portfolio risk. Metrics like standard deviation, value-at-risk, expected shortfall, and others are powerful tools for professional risk management. However, for non-financial professionals, these measures are not intuitive, confusing, and occasionally downright terrifying.
Read the full article here by Kendrick Wakeman, Advisor Perspectives.