The best risk profiling and risk tolerance software in 2020

The best risk profiling software in 2020

Welcome to our yearly trends in risk profiling review where we round up the best risk profiling software solutions out there.  In this review we look at the established risk profiling questionnaires for wealth management as well as new competitors to the field. This review is intended to help financial advisers determine which systems are best suited to their firm’s ethos in terms of client risk tolerance assessment.


Comparison methodology and disclaimer

We are not affiliated with or clients of any of the companies we mention in this report.  All information is based on our market enquiries and what is available on each provider’s website.  Please make your own enquiries to independently verify this information before signing up to a given provider.  If you think any of the information contained here is not accurate please let us know and we will happily correct it.


No, we haven’t included Stackup Risk in the list

Clearly, we have a view on how risk tolerance assessment should be done and we’ve designed our risk profiling tool riskAPP accordingly.  But, this doesn’t mean that we can’t appreciate what others have done and help you by highlighting what we believe are their key differentiators.  We are in a unique position to make the assessment as we have had to continuously consider the best way to build a client risk profile, thus know the trade-offs with each feature decision.


Risk profiling software providers compared. 


Table 1 – Risk Profiling Software Providers

Name

Website

Finametrica

www.finametrica.com

Riskalyze

www.riskalyze.com

True Profile

www.trueprofile.com

Oxford Risk

www.oxfordrisk.com

Pocket Risk

www.pocketrisk.com

Tolerisk

www.tolerisk.com

 


What is the best risk tolerance questionnaire?

As you likely already know, deciding what is ‘best’ requires you to decide what is important to you in terms of client risk profiling.  With a field as nuanced as risk tolerance assessment, different advisors will resonate with different approaches.  These approaches vary in their core methodologies, academic rigour and how involved the assessment is. Without creating more questions than answers, first let’s look at the key differences between the tools out there. 

 


First things first, what’s your view on client risk profiling?

When you are trying to determine your client’s risk profile, do you expect:

 

1.     the risk profiling software to tell you the client’s risk tolerance with little input from you, the advisor?

 

OR

 

2.     the risk profile assessment to provide you with information to discuss with the client, which you then use to discover their risk profile together?

 

If your answer is 1, then an econometric based risk tolerance assessments such as Riskalyze or True Profile may be more up your ally.

 

If your answer is 2, then a process driven, psychometric risk profiling questionnaire such as Finametrica is more likely to be your thing.

 

Let’s figure out what this means.

 


What are the key differentiators between risk profiling companies  on the market?


We’ve identified six key differentiators, which will help you determine which system is right for you:

 

·      Differentiator #1. Psychometric vs. econometric methods

·      Differentiator #2. Risk profiling as a process vs. a questionnaire

·      Differentiator #3. Willingness vs. willingness and ability to take risk  

·      Differentiator #4. White label and customisation vs. no customisation

·      Differentiator #5. Open API vs. no API

·      Differentiator #6. Pricing and availability by region

 


Differentiator #1:  Psychometric risk tolerance questionnaires vs Econometric risk tolerance assessments.


There are two primary schools of thought for how to elicit an investor’s risk tolerance.  The first and most established is psychometric risk profiling which was pioneered in the 90’s. 

 


Psychometric risk profiling

Psychometrics is a field of applied psychology where statistical techniques are used to try to cut through inaccuracies and biases inherent when people answer questions about themselves.  The investor profile questions tap into various risk profile factors deemed relevant to an investor’s risk profile and these factors are then combined into a final score.  Common factors assessed include the investor’s:

 

·      risk tolerance to losses

·      reaction to gains

·      portfolio allocation preferences

·      financial knowledge

·      capacity to take risk (although this isn’t strictly ‘risk tolerance’ it is sometimes included in a risk tolerance quiz)

 

The psychometric risk profiling surveys typically include a series of questions such as:

           

If your investments were to fall by 15%, you would start selling some of your investments.

·      Strongly agree

·      Agree

·      Neutral

·      Disagree

·      Strongly Disagree

 

A statistical property of these psychometric surveys is that the more questions they ask, the more accurate their result are. So on average, psychometric risk profiling questionnaires are longer than econometric profiling methods.

 


Econometric risk profiling

Econometric risk tolerance assessment methods are newer and have gained popularity over the past five years.  These methods are based more directly on classical economic and behavioural finance theory compared to psychometric methods and typically encompass ideas of utility theory and prospect theory as a basis for their assessment.

 

Econometric methods assume that a client’s position on a utility curve (and thus their risk tolerance) can be mathematically pinpointed. Thus, they typically arrive at a risk score without further input from the advisor or client. They also tend to use fewer questions to arrive at their final score.  This has obvious advantages for the client experience and means that they have been able to ‘gamify’ risk tolerance assessments in that clients are asked a series of questions such as:

           

            What percentage risk would you be willing to take for the same percent reward?

                        < then the client can enter percentages such as -5% +5%, -20% + 20% etc>

 


Finametrica vs. Riskalyze

The two largest risk profiling providers who have taken these two different approaches are Finametrica and Riskalyze.  Finametrica’s system is based on psychometric risk profiling, while Riskalyze has an underlying econometric model based on utility curves and prospect theory.  If choosing between these two providers your choice therefore becomes one of psychometrics vs econometrics.  We talk more about the implications of this in a moment.

 


Other providers

Oxford Risk, Pocket Risk and Tolerisk all use psychometric risk tolerance questionnaires (Tolerisk also use a non-psychometric quantitative analysis for their risk capacity analysis – more about this later).  True Profile is a smaller provider who offers an econometric based risk tolerance measurement technique.



How is the adviser and client experience different in psychometric vs econometric risk profiling?

Firms that assess their client’s risk tolerance via psychometrics typically use the questionnaire as discussion points to begin a conversation about risk.  This means that they look at the answers and discuss them with their clients to get a qualitative idea of their attitude on a range of investment risk topics, which compliments the quantitative output from the psychometric investment risk tolerance questionnaire.  The qualitative aspects are then used as a rationale to adjust the quantitative result of the questionnaire, should it be deemed appropriate to do so.  This is certainly a process and requires a view from advisers regarding appropriate investments and risk. These in depth discussions about risk may add to the client experience and improve investment outcomes.

 

Econometric methods are typically designed to deliver an ‘answer’ to the client’s risk tolerance with less emphasis on qualitative input to discuss or adjust scores.  This makes the process quicker and has less adviser input, which may or may not be suited to how you view the benefits of risk profiling.

 


What are other key differentiators in risk tolerance software?

Beyond what each risk tolerance software does ‘under the hood’, the next major differentiator is what tools they provide the advisor after the initial risk tolerance questionnaire.  While some providers simply offer the risk tolerance quiz, other providers start with the risk tolerance survey and then provide functionality to help advisers to set client expectations.

 


Differentiator #2:  Risk profiling methods as a process

Risk profiling can be seen as a multi-step process in which the investment risk tolerance questionnaire is just the start, or it can be seen as just a questionnaire.  Whether you are looking for a solutions provider which offers a process or just a survey will depend on whether you believe there is value in running clients through information like market norms and what they can expect from their portfolio in the future, or whether you already have other methods to communicate this information.

 

Some providers offer tools and reports that provide historical and/or predicted market risk attributes designed to help clients understand what they can expect in the future.  This process is thought to increase their willingness to ‘stick to the plan’ as the client knows what to expect and is theoretically more likely to hold onto their portfolio during a downturn.  Whether increased knowledge actually translates into behaviour is something for you to decide. However, there are numerous academic studies showing that higher financial literacy is at least correlated with higher risk tolerance.  A recent paper by the CFA institute, CFA risk tolerance questionnaire, goes into detail about the theoretical underpinnings of this.

 


Finametrica vs. Pocket Risk

Risk profiling methods as a process is the key differentiator between Finametrica and Pocket Risk.  If you are looking for expectation setting tools rather than just the risk profiling questionnaire then Finametrica will be the better choice.

 


Other Providers

Finametrica, Riskalyze, Tolerisk and probably Oxford Risk (we don’t have much visibility on this) all provide other tools so that the risk tolerance assessment is just one step in a process.


Differentiator #3: Willingness to take risk, or willingness and ability to take risk

More recently, risk profiling software providers are moving beyond just risk tolerance or a client’s willingness to take risk and reporting their ability to take risk.  This results in output that is more akin to a risk profile rather than just a risk tolerance assessment.  While terms are often confused and interchanged, willingness and ability to take risk are separate constructs and should be measured separately.  Some providers provide risk tolerance software that only measures willingness, while others provide risk profile software that combines willingness and ability into a final score.



 

Riskalyze vs. Tolerisk

A key difference between Riskalyze and Tolerisk is that Tolerisk assesses both willingness and ability to take risk, whereas Riskalyze only assesses willingness to take risk.  Willingness refers to how a client’s psychology affects their comfort level related to financial risk. Ability, on the other hand, refers to capacity related factors,  such as time horizon and level of financial strength.  While Riskalyze focusses on a wealth management client’s risk tolerance, Tolerisk combines this with a quantitative analysis of the client’s risk taking ability or capacity into a final risk taking score.

 


Other providers

Pocket Risk includes an investor’s capacity to take risk in their risk profiling quiz by default.  Finametrica has a short version of their survey (marketed primarily towards robo-advisers) that includes a risk capacity question, however their main adviser survey does not.


Differentiator #4: White label, custom branding and customisation

Financial advisor technology tools differ in the degree of customisation available for independent firms. Some tools allow advisors to market risk assessments under their own brand, using custom logos, colours and formatting styles (so called ‘white labelling’).  As a further step, some providers even allow advisors to hide the fact that the software is offered by an external company by embedding the risk tolerance quiz directly into their website so that the URL (www.youradvisorwebsite.com) is always the advisor's.

 

Another customisation option offered is the ability to add additional questions to a survey so that the advisor can incorporate fact finding questions beyond risk profiling.  Others allow advisors to add or hide sections of key reports to cater to differing clients needs.

 

Finametrica, Riskalyze and Pocket Risk all offer white labelling to varying degrees.  It is unclear from our review whether other providers also offer these options.


Differentiator #5: Open API for custom integrations

An API (Application Programming Interface) is a mechanism for risk profiling software applications to communicate with other systems already used by an advisor. Depending on a firm’s size, this is an important factor to consider when selecting a risk profiling tool.  Larger firms often require a degree of custom development to get new software working and talking nicely with their established systems.  Some risk profiling providers therefore have APIs (application programming interfaces), while others do not.

 

Again, this feature is something that could be hidden away or offered to some companies but not advertised, however Tolerisk, Riskalyze and Finametrica definitely have APIs, and Oxford Risk probably does.


Differentiator #6: Price and regions served

Obviously, price will always be a factor and whether or not the risk profiling software is actually offered in your country is important!  For companies showing multiple levels of pricing on their website, we have taken the middle tier for this differentiator.  All figures are in USD for comparison purposes.  With this final differentiator we can put everything together in the table below.

 


Risk profiling software key differentiators

Table 2. Best risk profiling companies of 2020 compared on key differentiators

Software

Differentiator 

Finametrica

Riskalyze

True Profile

Tolerisk

Pocket Risk

Oxford Risk

#1 -Measurement basis 

Psychom

Econ

Econ

Psychom

Psychom

Psychom

#2 - Extra steps

Many

Some

Few

Few

No

Few


#3 – Willingness and Ability

No for main product

No

No

Yes

Yes

No

#4 – Customisation

Some

Some

No

Yes

Yes

Yes

#5 – Open API

Yes

Yes

No

Yes

No

Probably


#6a Price (monthly)

$83

$350

$129

$99

$99

?

#6b Regions

Global

USA

Global

USA

UK, USA, Australia

UK/EU



 


We hope that this review and the final table will help guide you to the solution that is right for you.  If you have any questions we would love to hear from you on hello@stackup.io.