One of the challenges financial planners face is figuring out how to determine an individual's risk tolerance and explain it to them. The challenge is helping clients understand what a downside looks like and feels like. It’s hard to prepare people for the ups and downs of the market.
In 2011, software was developed to more effectively communicate the declines in the market. That software is better known as Riskalyze. In this episode of Upthinking Finance™, Aaron Klein—the Co-Founder and CEO of Riskalyze—shares more about the company that invented the risk number to help quantify, explain, and define risk.
When Aaron was 12, he worked for his dad after school. It taught him a love for business. He learned that your customers are everything. If you take care of your clients, they’ll take good care of you. Secondly, all you have is your reputation. If you invest in your reputation for serving your clients, it will turn out well. Aaron also realized he wanted to be in a business that had better margins.
Aaron was running global product for a division of an options brokerage firm, building technology tools for traders. He’d always known he wanted to start his own company. He was talking to a friend who was a financial advisor about the fact that financial advisors didn’t have the tools to understand a client and match them with the right risk in their portfolio. They used words like “conservative,” “moderate,” and “aggressive” with no idea if the advisor and client were on the same page.
They had a mutual friend who had invented and patented a system for creating a mathematical function that represented risk tolerance (built on Kahneman's Prospect Theory). It was a three-hour-long process that resulted in a good outcome. They partnered together, raised some capital, and launched in 2011. Two years later, the product was brought out of beta testing and advisors could implement it.
Riskalyze is designed so that a financial advisor can tell their story. It’s a technology that helps determine how much risk a customer is comfortable with in their portfolio. It also helps measure the risks you need to take towards reaching your goals. It helps you see the risk you currently have in your portfolio. Once you understand those factors, you can answer how much risk you should have.
Aaron points out that they didn’t invent the concept of getting clients to understand risk. There are two things financial advisors have been told to never address—risk and short-term. The challenge is that investors react to risk in the short term. Everyone understands on some level that when you invest in something, you run the risk of the value dropping.
A large part of their success is that Aaron’s co-founder is a financial advisor. He brought a unique perspective. But shaping the product was Aaron’s full-time job. He always approached it from a lens of, “How would I explain this to my dad? How would I explain this to my wife?”
They want Riskalyze to be the tool that financial advisors use to help their clients see and understand...
