Using Analytics in Wealth Management: The Good and Bad

Part 1 – Portfolio risk measurement


This is the first part of a new series on investment analytics in the wealth management industry and how advisors are using analytics to communicate with clients and prospects. We will look at some of the more popular analytics and go over what they are, their good points, and their potential pitfalls.

Since the financial crisis, wealth advisory clients have shifted their relationships from one of blind trust to a desire to internally understand and validate that a particular advisor recommendation is the right thing to do. Advisors have obliged, taking their conversation from “trust me” to educating and partnering with their clients around their finances and future. Ironically, many advisors have reported that this education and partnership approach builds trust.

The challenge becomes how to educate clients about their finances when they may have little or no financial training. Turning to portfolio analytics may be one part of the solution. But most financial analytics are confusing for people outside of the industry. Forward-thinking advisors have been searching for and employing analytics very carefully, choosing only those metrics that are simple, understandable, and meaningful for people with no financial training. This series will explore some of these metrics, along with their benefits and pitfalls.

Today we will be looking at the important area of portfolio risk. Part 2 will focus on capital market assumptions. And part 3 will focus on Monte Carlo analysis.