By Rebecca Lake, CEPF®

A financial advisor reviews different areas of focus for financial risk.

Clients look to you for help when navigating risk factors that may harm their portfolios. Financial risk analytics uses a big-picture approach to identify where threats may lie and the impact they could have on your clients’ assets and goals. Incorporating financial risk analysis strategies into your practice can enhance the client experience and encourage engagement, both of which are critical to your firm’s long-term growth and success.

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Understanding Financial Risk Analytics for Advisors

Financial risk isn’t just one thing, it’s many. Risk analysis, from a financial advisor’s perspective, encompasses several areas of focus:

  • Market risk. Market risk is simply the risk of losing money due to changes in the market. This type of risk may be top of mind for your clients since it can produce the most visible and immediate impacts on their portfolios. A drop in stock prices, for instance, may trigger a flurry of calls from your more risk-averse clients.
  • Interest rate risk. Fluctuating interest rates can be a mixed bag for investors. Rate hikes, for instance, could lead to slower economic growth and a downturn in stock prices. Bond investors, however, may see higher yields.
  • Currency risk. Currency or foreign exchange risk is the threat of losses due to shifting foreign exchange rates. In a worst-case scenario, this can translate to devaluation of a country’s currency which can have the potential for widespread financial upheaval.
  • Credit risk. Credit risk is the risk that an entity will fail to uphold its financial obligations. For example, a publicly traded company that relies heavily on debt to fund its operations could see its stock value fall if it defaults on one or more loans. Bond issuers receive credit ratings based on how likely they are to make all required payments to investors.
  • Liquidity risk. Liquidity risk measures how easily an investment can be liquidated for cash, without taking a loss. That’s an important consideration for shaping client portfolios to reflect their immediate, mid-, and long-term cash needs.
  • Regulatory risk. Regulation can affect how companies or entire industries do business, which can have a ripple effect on investor portfolios. Financial risk analytics considers how new regulations or changes to existing ones could affect investment outcomes.
  • Reputational risk. When public opinion turns against a company its bottom line may suffer. For instance, consumers may choose to boycott a company based on negative perceptions of its position on a particular issue. That could send the company’s revenue—and stock prices—into a downward spiral.
  • Operational and systemic risks. In a perfect world, the systems society relies on are never at risk of failure. The reality, however, is that things like natural disasters, disruptive technologies, and geopolitical events can threaten the stability of those systems.

Using Financial Risk Analytics to Grow Your Firm

A financial advisor reviewing the level of financial risk that her clients are willing to take on.

Risk analytics can have a snowball effect on your firm’s growth. Enhancing the client experience can encourage retention and loyalty, which in turn may help to drive more referrals your way. As you acquire new clients, assets under management and revenues increase, and you may have opportunities to expand your service offerings further.

Here are some strategies to help you (and your clients) get the most from financial risk analytics.

  • Get personal. Financial risk analysis is client-specific and should speak to their unique situation, needs, and fears. Having clients complete a risk tolerance questionnaire that includes questions that are tailored to their circumstances can offer a starting point for implementing risk analysis.
  • Go digital. Risk analysis tools help advisors zero in on the risks that are most relevant to their clients’ unique situations. Some of the best risk analysis platforms incorporate portfolio visualizer tools that you can use to generate charts or graphs to fully illustrate potential outcomes to clients.
  • Make real-world connections. Risk analysis is largely hypothetical and relies on if/then scenarios. One of the most effective ways to drive risk home to clients is to use real-world situations. For example, a client who is planning to retire in the next 10 years might have very real concerns about where Social Security is likely to fit into the picture. Modeling asset drawdown strategies with and without Social Security factored in can help them understand what the best or worst case might be.
  • Be balanced. Your clients may naturally focus on how risk could hurt them and they may need a gentle reminder that it can have its rewards as well. Running multiple risk assessment models for the same scenario allows you to guide your clients through every possible outcome, both positive and negative, so they can feel fully informed and confident about the decisions they make.
  • Connect the dots. Financial risk analysis works best when you have all the relevant data you need from clients. If your client has assets held away, for instance, your risk analysis may feel incomplete without factoring them in. A robust risk analysis tool can help you build out complete datasets so that you’re producing the most accurate models possible. You can then share those numbers with the other members of your team to ensure that everyone is on the same page.

It’s also important to look inward to assess risks that might compromise your analysis.

Incomplete or incorrect data, or human error, for instance, can lead to skewed results. If you’re using risk analysis tools that use AI, the biggest risk there is usually the quality of the underlying data. Addressing these and other risk factors can promote greater accuracy when analyzing client portfolios.

Bottom Line

A financial advisor rebalancing the portfolio of a client to match their risk profile.

Financial risk analysis may not be the most glamorous aspect of what you do as an advisor, but it’s a critical undertaking to ensure your clients get the best advice possible. The end goal is to have satisfied clients who are comfortable entrusting their assets to you and referring others to your firm.

Tips for Growing Your Advisory Business

  • You know that marketing is essential to your firm’s success but it can be frustrating when you see little return on your investment. Turning to an advisor marketing platform for help is something you might consider if you want to improve your brand’s visibility and connect with more leads. SmartAsset AMP uses a holistic approach to help you match with prospective clients who are looking for what you have to offer. Schedule a demo to learn how you can leverage it to grow your business.
  • Broker-dealers and RIAs are required to have a chief compliance officer (CCO), though it’s up to you to decide who fills this role. You might handle the responsibilities yourself in the initial stages of growing your business, and decide to hire a full-time or part-time CCO consultant later. Investing in compliance software can make it easier for whoever acts as your firm’s CCO to do their job.

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