How Morningstar is preparing for a robot apocalypse

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What would happen to your client’s portfolio during a robot apocalypse? Morningstar wants to help advisors find out.

The firm’s new risk analysis tool, the Global Risk Model, attempts to predict the impact of future scenarios on portfolios — including a future recession or a societal take over by machines that causes massive unemployment.

“There’s always something new to pay attention to in the news these days,” says Lilianna Myers, product manager with Morningstar. In a world with a relentless 24-hour news cycle, advisors need to find answers quickly and be able to communicate that information to clients effectively, she says.

Morningstar is competing against Riskalyze, which claimed more than 32% of the risk tolerance software market in 2017, according to Financial Planning’s 2017 Tech Survey.

In October, the Atlanta-based software company unveiled a GPA metric that showcases the efficiency of returns per unit of risk, and a new client profile that measures the client’s desire and need for risk. A new mobile app allows advisors to respond to leads, access client data and approve autopilot trades with a few taps, says the firm.

Next month, Riskalyze plans to unveil a tool for premier customers to add events, such as sending a child to college, buying a house or taking Social Security.

Morningstar’s new tool analyzes the amount of risk associated with a portfolio and determines performance under micro- and macro-economic conditions. For example, if a client wants to know about an oil price increase as a result of a sanction, there is a risk model associated with that scenario. The advisor clicks on the selection and gets a projection of the portfolio’s performance, which can be drilled down to each individual stock holding.

Other preloaded options include a potential U.S. trade war with China or a Fed interest rate hike. Advisors can also create custom geopolitical events as well, says the firm.

The projected returns are tracked against 20 years of securities’ data and can uncover sources of potentially unhealthy volatility, says the firm. Some of the modeled scenarios are taken from recent historical events like the financial crisis, the Greek debt crisis of 2010 and this year’s spike in volatility.

The model is defined by 36 factors across style, sector, region and currency. Sectors like technology or healthcare can be analyzed, along with regions like emerging Asia Pacific or the developed Americas. Currencies include the Australian dollars, British pounds, euros and U.S. dollars.

The tool also breaks down mutual fund holdings into their individual equities to do the analysis.

“We saw a gap in our products around future events,” says Dermot O’Mahony, Morningstar’s head of software products. “Adding the risk model is really the best approach to solve it.”

The Global Risk model, which has about 450 users, according to Morningstar, is currently in beta. A basic version of risk model will be available on Morningstar Office Cloud sometime next year.

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