risk management for financial advisors

Risk Management for Financial Advisors Made Easy

“Living at risk is like jumping off a cliff and building your wings on the way down.”Hidden Levers Logo
― Ray Bradbury

“Risk comes from not knowing what you’re doing.”
― Warren Buffett

It often seems that the world has been just lurching from one crisis to the next, playing havoc with buy and hold strategies and modern portfolio theory.  Wirehouse advisors have access to macroeconomic analysis and sophisticated tools to assist them with risk management.  RIAs are at a disadvantage since these tools aren’t readily available and can be prohibitively expensive.

risk management for financial advisors

Hidden Levers is a technology company that is well-positioned to help. I first encountered them at the Tools and Technology Today (T3) Conference back in February, although they have been around since 2009 and currently are located in the Bloomberg Technology Incubator in New York City.  They offer a web-based service that provides a toolkit for advisors with the goal of helping them to turn risk management into a profit center by:

  • Enhancing prospecting for new clients
  • Prompting existing clients to be more pro-active
  • Increasing wallet share by providing opportunities to impress clients

The biggest value of their service is assessing the impact that macroeconomic trends and scenarios will have on your portfolios and what actions to take.  Hidden Levers isn’t a fortune teller, what it does is illuminate the sensitivity of portfolio holdings against over 100 macroeconomic indicators or levers.  These include indices, commodities, currencies, and interest rates, to name a few of the statistically significant ones.

Hidden Levers offers multiple levels of service on a monthly subscription basis with prices starting at $250 per month. They have approximately 350 subscribers, with a mix of brokers, RIAs and also some hybrid advisors.  While they have individual users at firms such as UBS, Merrill Lynch, Wells Fargo and J.P. Morgan, they are currently running an eight week pilot with Raymond James.

Portfolios can be imported directly from the custodian or from an Excel spreadsheet and they can be updated anytime with real-time analysis presented.  Although, the prices displayed are from the previous day’s close.

risk management for financial advisors

One useful function displays a dashboard with a Summary Risk Profile for a selected portfolio (see screenshot on the right).  This provides a quick overview of various analytics and also allows you to view the details of an economic scenario that could impact the portfolio.

The Risk Profile can be also run at the household level for an aggregated view across multiple, related portfolios.

Impact Scenarios

The scenario modeling feature is a powerful tool that provides a quick snapshot of how a specific series of events will affect a portfolio.  Users can select popular scenarios such as Government Shutdown, Housing Market Rebound or Fed Stress Test or you can even go back in time and compare against past events such as the 1979 Iranian Revolution or the October 1987 Market Crash, in case you are worried about something similar occurring.

These functions are all quite easy to use and don’t require a degree in economics in order to generate a wide variety of outcomes.  However, for advisors that do have a degree in economics, all of the assumptions can be tweaked to fine tune a scenario to your liking.  The system responds in real-time to show how the portfolio would be affected as you adjust the sliders one way or the other.

risk management for financial advisors

Portfolio stress testing looks at the risks and potential losses that a portfolio might face.  Up until now, the process has required complicated software and in-depth knowledge of risk management in order to interpret the historical data and correctly apply it to the current situation.  Some said it was as much an art as a science.

Hidden Levers facilitates portfolio stress testing by making it easy for advisors to analyze their holdings and enables them to view and present the results clearly and concisely.

The system runs regressions on 2-year and 10-year basis, with all calculations updated nightly.  A quantitative analyst could reproduce a few dozen regressions in an hour or so using a product like MatLab.  But Hidden levers runs over 6 million regressions every night so there is no shortage of available options for their subscribers to evaluate.

An interesting aspect of their system is their development of an expanded taxonomy of industries, which is more granular than the standard list provided by Standard & Poor’s.  This enables the Hidden Levers system to provide results that are more relevant to each holding in a portfolio.


risk management for financial advisors

One of the factors that drove the founders to create the system was RIA’s lack of access to sophisticated quantitative analysts and the price of Bloomberg terminals that offered advanced analytics.   For buy and hold advisors that don’t require real time data, Hidden Levers can be a valuable tool, especially if they need access correlation reports to monitor portfolio diversification.

A user can drill down into any security and view the indicators that are most correlated and uncorrelated with it.  This is useful when selecting individual securities from an industry that you want to include or avoid exposure in your portfolio.  For example, most components of the banking sector are highly correlated with interest rates, but less so with other indicators.  The housing sector has a low correlation with JP Morgan but a very high correlation with Bank of America.  Depending on which way you expect housing to move, this feature can factor into your decision making process.

This same screen also shows some additional volatility measures for the selected security such as standard deviation and peak to trough returns from the past ten years.

risk management for financial advisors

Portfolio cross-correlation is also available for advisors who follow Modern Portfolio Theory (MPT) so they can see the correlation of each component against the entire portfolio.  This works the same for mutual funds or ETFs and their underlying components.

A great way to leverage the power of the systems correlation function is using the Hedging Wizard.  For an advisor who is concerned about a specific scenario occurring, such as a government shutdown, the wizard will identify the parts of your portfolio that are highly correlated with the scenario  It will then provide a list of replacement securities that have little to no correlation.  This saves a tremendous amount of time when researching portfolio changes.

A Web-Based Lead Generation Tool

Hidden Levers recently released a lead generation tool that allows prospective clients to run simple stress tests against their portfolios.  This feature was developed in response to advisor requests for help with their marketing efforts, so the firm designed a micro website with customizable branding to which an advisor can direct their warm leads.

The system only displays data that isn’t a compliance issue when delivered over Internet such as maximum drawdown and volatility of their portfolio.  It can automatically send the advisor an email when a new lead logs in along with the scenarios they selected.  This arms the advisor with information about the prospect to make the initial conversation smoother and to facilitate bringing them into the office for a detailed analysis.

risk management for financial advisors

Hidden Levers integrates with Salesforce, Redtail and AssetBook with future partnerships with MoneyGuide Pro and Allbridge in the pipeline.

Risk Management for Financial Advisors

I would recommend checking out Hidden Levers for any advisor that is in the Rep as PM mold and makes some or all of the investment decisions for their clients.  It can also be very useful for advisors who use third party managers or DFA advisors that subscribe to an agency to provide them with models.  Also, advisors that are more relationship-focused could take advantage of the lead-generating functionality and/or integrate the canned scenario modeling into their client reviews.

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The Wealth Tech Today blog is published by Craig Iskowitz, founder and CEO of Ezra Group, a boutique consulting firm that caters to banks, broker-dealers, RIA’s, asset managers and the leading vendors in the surrounding #fintech space. He can be reached at craig@ezragroupllc.com