How Riskalyze Won The Hearts Of Financial Advisors And Upgraded The Advice Industry

The Benzinga Fintech Summit is an event for those interested in finance, entrepreneurship, capital markets, deal-making, networking and accelerating their business.

It's a chance to interact with and learn from founders, C-Suite institutional executives, leaders of the biggest and hottest fintech companies, brokerages, banks, quants, hedge funds and managing directors from VC funds about the future of financial technology through networking hours, exhibiting, panels and keynote addresses.

To get you prepared for the event, Benzinga will profile each fintech company sponsoring and exhibiting.

Financial advisors have been trying to claw out of the age of spreadsheets for decades. Now, financial technology is presenting the financial advice industry with the opportunity to radically change the way it does business, offer its services to more clients, and help those clients achieve their goals more fully.

Riskalyze is one of the fintech companies leading the charge to change the way financial advising works by offering a technology suite that helps advisors identify which portfolios are best suited for which clients depending on the clients’ risk profiles.

Ahead of Riskalyze CEO Aaron Klein’s speaking engagement at the Benzinga Fintech Summit in San Francisco, Benzinga caught up with him to learn more about how the company is upgrading financial advice.

Benzinga: Aaron, what’s the elevator pitch for Riskalyze?

Aaron Klein: Riskalyze is a risk alignment platform that allows advisors to pinpoint how much risk their clients can handle and align their client’s portfolio to fit that.

We believe as a company that investors all too often sabotage their own investing by getting excited, being optimistic and buying at the high, then sell at the low and blow themselves up when the markets pull back. Warren Buffett probably said it best when he said “stocks are the only thing consumers refuse to buy when they’re at their cheapest and only want to buy when they’re at their most expensive.”

So our thesis and mission as a company is empowering the world to invest fearlessly. We believe if you can equip people with a short-term framework to understand and react to risk appropriately, we can take a fearful investor who makes bad short-term decisions and empower advisors to turn them into a fearless investor who makes short-term decisions that protect their long-term financial goals.

BZ: How did you go about identifying this need for financial advisors? What kind of research did you do?

Klein: My career has been at the intersection of finance and technology. In my last job, I was running global product for an options trading firm, and it was very interesting to me to see how poorly average investors thought about risk. I said that to a buddy of mine who was a financial advisor, and he said “If you think that’s crazy, you should see how financial advisors think about risk!”

Suffice to say, he’s my co-founder and chief investment officer today. That was the impetus for starting the company. Our belief was that investors are sabotaging themselves, and that advisors desperately want to help clients make the right decisions, but they don’t have the right framework and context to help the client make that decision. We wanted to equip them with the technology to help them do that.

What’s interesting is that we invented a new space. There was no risk-alignment platform that helped advisors do that. There were questionnaire products that answered half the question, there were a few portfolio analysis tools that would answer the other half, but we invented the concept of the risk number. We can help advisors pinpoint the client’s risk number and then we score portfolios using that number.

BZ: How does the tech work? What do you feed into it?

Klein: I’ll talk about the two different sides of the coin. A lot of the innovation was figuring out those sides of the coin and bridging the two together. On the one hand, we took some concepts that had really never made it out of academia and into everyday use. They’re centered around the economic framework called prospect theory, which won the Nobel Prize for economics in 2002. We took prospect theory and built a bunch of proprietary technology on top of it to understand how to move up and down a client’s personal financial spectrum to understand when they prefer risk and when they prefer certainty.

Once we do that, we built a mathematical formula behind the scenes that lets advisors turn that into the client’s risk number. That’s how the client-side works.

On the flip side, we need to match that up with a portfolio. So, the inputs for that piece of the technology are largely market data. We effectively take daily pricing data for nearly a quarter-million securities — every U.S. stock, ETF, mutual fund, variable-annuity sub accounts, SMA third-party money managers, proprietary non-traded strategies, all kinds of different products. We take all the data for those, we have new data streaming into our systems every night on those securities.

We’re crunching a return and a volatility model for each of those securities every night, and in real-time as the advisor is building the portfolio, we’re also doing the cross-correlation analysis inside the portfolio and really analyzing how does this portfolio and the different mix of securities in the portfolio actually correspond to real risk, and rolling that into a portfolio-wide risk number and probability range.

That’s how the advisor can say to a client “Hey, you told me you wanted to be a 51, your current portfolio is invested like a 92, and let me show you this risk-50 portfolio that I think is much closer to where you want to be.”

BZ: How do you roll out products like this? What were advisors’ reactions?

Klein: When I was first talking to financial advisors about this and was testing the waters around November 2012, I was the one handling those calls and all those discussions. I was doing one-on-one demos with advisors. The product was just so rough. It was the early days, it was in beta. It really depended on the kind of advisor we were talking with.

Think of adoption curves. If you’re in the early part of the adoption curve and you’re talking to early adopters, they’re going to be much more conducive. They can see where the technology is going to go and get excited about the idea of leveraging a new technology. I was talking to a broad cross-section of advisors in the beginning and to be honest, it was discouraging. A lot of advisors didn’t think it was useful, or said they could do it on a spreadsheet, blah blah blah.

I think what was really interesting was as we kept improving the product, I met Josh Brown, you know, the Reformed Broker. I met him at a conference, showed him the product and he just loved it. It was still in beta, so he had no business loving it, but he could see the future of where it was going. He jumped aboard as one of our earliest customers and that gave me a lot of faith that we were on the right track. It took us a few months to get it right, but when we came out of beta in March 2013 the product took off like a rocket.

That was four years and some change ago. We went from four people and zero customers to 185 employees serving over 20,000 advisors across the country.

BZ: How has scaling the company worked? What kind of features have you rolled out as you’ve grown?

Klein: We continue to innovate the core product. Our objective there is to innovate the advisor-client engagement experience. We’re constantly focused on how we can make that better. We don’t roll out features for the sake of rolling out features. We really think about whether features can drive the advisor can be more successful in that experience.

We have clients ask us stuff like this all time—why don’t we build CRM, why don’t we build financial planning, performance reporting, portfolio accounting, and we just keep saying no. We know what we’re good at and what’s in our DNA, so we want to focus on only shipping the products that will accomplish that mission of empowering the world to invest fearlessly. That begins with understanding who the client is and aligning them with the right amount of risk.

That’s the mission of the core product. We did recently roll out the autopilot platform. A lot of people think autopilot means the advisor makes decisions in the Riskalyze product and that we make it easier for the advisor to implement those decisions. While that’s true, the reason we decided to ship autopilot was because we felt it furthered the mission.

What I mean by that is advisors tend to have a minimum level of assets that they require from a client in order to bring them on. It can be pretty high. In L.A., it can be tough to find an advisor that will take under a million dollars in investable assets. What’s really interesting is that I’ve met advisors who want to democratize access to their advice, but, they say if they did that, they’d go out of business because of the manual labor required in managing smaller clients.

We looked at that and saw that the manual work is not where advisors are driving value. We wanted to take the hassle out of advising and let advisors focus on their client relationships again. We think that will have a profound effect on democratizing access to advice and push the effects of fearless investing across a broader group of people.

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Photo credit: Riskalyze