For many years, large financial institutions have designed their own risk assessment tools, while most independent advisors relied on similar tools built into a software package that they had purchased. These tools generally passed SEC and FINRA regulatory muster, but there was always a question as to how useful they were in assessing clients risk profiles under real-life conditions.
Most professionals agree that the question was put to rest during the 2007-2009 bear market: While those tools might have had some value in limiting advisor liability, the vast majority had done a lousy job of measuring client attitudes toward risk.
Recently, a number of firms have come to market with standalone applications. One is Pocket Risk, which has an intriguing pedigree and approach.
John Ndege founded Pocket Risk in 2012 as a result of his own experiences. A former Facebook employee, Ndege found that he had money to invest when his equity became liquid after the companys IPO. But as he sought to understand his risk profile before he committed to an investment plan, he says, he didnt find any tools that adequately addressed his situation. So he teamed up with startup veteran Luke Saunders to create such a tool.
ANSWERING 4 QUESTIONS
Pocket Risk is designed to help advisors answer four questions in the affirmative:
- Do you have an objective, consistent and documentable risk process that could survive an audit?
- Are you leveraging technology to save time and money with a cloud-based solution?
- Does your process satisfactorily educate clients about risk?
- Are client assets allocated properly?
According to Ndege, Pocket Risk provides a scientifically validated process that helps to accurately gauge client risk tolerance. This should allow you to better educate clients about risk, and help you anticipate their behavior during market downturns.
Getting started with Pocket Risk is easy. The firms home page offers the option of a two-week free trial immediately or a 20-minute online demo. With the trial, you provide your name, other basic information and a credit card number; if you dont cancel the trial, youll automatically be charged for a subscription.
Perhaps the best way to become familiar with the application is to complete a questionnaire yourself, as if you were a client. To do this, you hit the Add New Client button. You have the option of completing the questionnaire now, as a client would if he were sitting with you in your office, or emailing the questionnaire.
When you choose to email the client, a box pops up with prepared text. (See the screen grab on the below) You can use the default or, if you prefer, can create your own email: Hit the Questionnaire Link button to generate a unique link for the client, then cut and paste it into your email.
There are a number of reasons you might want to use the latter option. You can use your own invitation and logo, and show the client that it is from your email domain.
There may also be compliance reasons for keeping outgoing email in your current workflows. For example, if your email integrates with your CRM, you would want your CRM to record the fact that you sent the questionnaire, and perhaps alert you if the questionnaire was not completed after a given number of days.
The advisor dashboard will ultimately list all of your clients. Pocket Risk also offers a mass client upload and email option in the My Account section of the application. This allows you to export names and email addresses from your CRM software into a spreadsheet and then to upload the file to Pocket Risk. Once the names are uploaded, you can select the names to email, edit your message template and send out the emails.
The questionnaire itself is well designed. It starts with a short explanation of what to expect, including estimated time required to complete it (5-10 minutes), and what to do if a question does not apply to your circumstances (picture what you would do under those circumstances).
The last of the questions deserves some mention. It explains that 60% of respondents to the survey score between 40 and 60 on a 100-point scale with 100 being the most risk tolerant and then asks how the respondent thinks he or she scored.
The analysis report is what sets Pocket Risk apart from most other questionnaires of this type. (A sample appears below.) First of all, it is short and sweet. At the top, in bold type, is your clients risk score. A brief paragraph puts the score in context, explaining that a score of 50 is average.
When I completed a questionnaire as a test, I scored an 84.
The report also puts the respondent in a risk tolerance group from 1 to 5, with 5 being the most risk tolerant. It then explains the characteristics of respondents in a group.
The next chart is also unique, in my experience. It charts the consistency of a respondents answers across all questions. Of the first 19 questions, all but three of my answers were consistent with a Group 5 risk score. Of the other three answers, two fell in the Group 4 category; just one answer fell in the Group 2 category. So my answers were highly consistent.
On the other hand, if I had ended up with a score of 50, putting me in risk group 3, but half of my answers were in group 5 with the other half in group 1, this would have been a potential red flag. It would indicate a lack of consistency, suggesting that risk group 3 might not be where I belong.
Further examination and explanation might be required before arriving at a proper risk assessment.
The final question asked me to anticipate my own number. My self-assessment was 75, reasonably close to the programs, which provided further confidence in my ranking.
At the end of the report, there is a recap of all the questions with my answers. There is also a brief summary that suggests I discuss the results with my advisor. There is a space for clients to jot down notes. A custom disclosure can also be preconfigured in the My Account section.
There is a lot to like about Pocket Risk. First, the applications interface is simple and intuitive; it could not be easier to sign up and begin using the program. Most of what you need to know you can figure out by navigating around, but if you need help, there are a number of videos that should get you up to speed.
I was most impressed by the output. The individual score, combined with the risk group number, gives the client a good sense of where he or she stands, as does the information about the distribution of responses in various risk categories.
The consistency-of-response information is critically important for advisors, and it is a good tool to help broach the subject of inconsistent responses with clients.
Pricing is competitive: $99 a month for two users with custom branding, unlimited clients, unlimited risk profiles, email and telephone support. There is also a solo version for $55 a month with a limit of 150 clients; it offers unlimited risk profiles but no custom branding and only email support. If you pay annually in advance, you get 14 months for the price of 12.
There are a few things that bother me, however. One is the requirement to supply a credit card to initiate the trial. Most firms in the industry dont require that.
Also, although Pocket Risk lets users edit an email when sending the questionnaire to clients, you cannot create your own custom email template.
You can connect your clients risk tolerance to an asset allocation, but the process is manual. The site includes information on how to map scores to a few model portfolios, and it provides some guidelines on what the characteristics of those portfolios might look like, but thats about it.
Whats missing for now and what the developers seem to underestimate the importance of is integration. There is no integration with the email applications that advisors use, nor are there any CRM integrations. Ideally, you would like integration with financial planning software and/or proposal generation software, so the client or prospect could complete the questionnaire, and you could then map the score to one of the models in your financial planning or proposal generation software. Integration with B-D and custodial interfaces would also be highly desirable in many cases.
Pocket Risk is an interesting new entrant into the client risk assessment field. The methodology looks sound, and the output is impressive for a new product of this nature.
If Pocket Risk can tweak the email system and secure the necessary integrations, it should win over its share of advisors in this relatively untapped market.
Joel Bruckenstein, a Financial Planning columnist in Miramar, Fla., is co-creator of the Technology Tools for Today conference series and technology guides for advisors, including Technology Tools for Todays High-Margin Practice. For more information, visit JoelBruckenstein.com. Follow him on Twitter at @FinTechie.