Riskalyze CEO Aaron Klein, Ep #18

One of the challenges financial planners face is figuring out how to determine an individual's risk tolerance and explain it to them. The challenge is helping clients understand what a downside looks like and feels like. It’s hard to prepare people for the ups and downs of the market. In 2011, software was developed to more effectively communicate the declines in the market. That software is better known as Riskalyze. In this episode of Upthinking Finance™, Aaron Klein—the Co-Founder and CEO of Riskalyze—shares more about the company that invented the risk number to help quantify, explain, and define risk. You will want to hear this episode if you are interested in...[3:30] The origins of Riskalyze[10:04] Aaron’s experience developing Riskalyze[14:09] How Riskalyze helps financial advisors[19:28] The Riskalyze stress test [28:32] Can you misuse the tool?[31:04] How I came across Riskalyze[33:35] Using Riskalyze for portfolio research[38:28] Riskalyze’s commitment to treating people well[44:25] Aaron’s favorite thing about Riskalyze[47:34] The important work Aaron is doing in Ethiopia The origin story of RiskalyzeWhen Aaron was 12, he worked for his dad after school. It taught him a love for business. He learned that your customers are everything. If you take care of your clients, they’ll take good care of you. Secondly, all you have is your reputation. If you invest in your reputation for serving your clients, it will turn out well. Aaron also realized he wanted to be in a business that had better margins.Aaron was running global product for a division of an options brokerage firm, building technology tools for traders. He’d always known he wanted to start his own company. He was talking to a friend who was a financial advisor about the fact that financial advisors didn’t have the tools to understand a client and match them with the right risk in their portfolio. They used words like “conservative,” “moderate,” and “aggressive” with no idea if the advisor and client were on the same page.They had a mutual friend who had invented and patented a system for creating a mathematical function that represented risk tolerance (built on Kahneman's Prospect Theory). It was a three-hour-long process that resulted in a good outcome. They partnered together, raised some capital, and launched in 2011. Two years later, the product was brought out of beta testing and advisors could implement it. What does Riskalyze do?Riskalyze is designed so that a financial advisor can tell their story. It’s a technology that helps determine how much risk a customer is comfortable with in their portfolio. It also helps measure the risks you need to take towards reaching your goals. It helps you see the risk you currently have in your portfolio. Once you understand those factors, you can answer how much risk you should have.Riskalyze helps financial advisors simplify risk toleranceAaron points out that they didn’t invent the concept of getting clients to understand risk. There are two things financial advisors have been told to never address—risk and short-term. The challenge is that investors react to risk in the short term. Everyone understands on some level that when you invest in something, you run the risk of the value dropping. A large part of their success is that Aaron’s co-founder is a financial advisor. He brought a unique perspective. But shaping the product was Aaron’s full-time job. He always approached it from a lens of, “How would I explain this to my dad? How would I explain this to my wife?” They want Riskalyze to be the tool that financial advisors use to help their clients see and understand what they’ve already been telling them for years. The Riskalyze stress testThere is always a 5% risk in any portfolio that cannot be quantified. That risk includes things like the housing market crash, the Covid-19 pandemic, the inflation crash, etc. Those things happen and cannot be predicted. The job of a financial advisor is to control the 95% of the risk that is quantifiable. If you look at that range, you can point out that normal behavior for the Risk 45 portfolio might be down 8% to up 12% over 6 months. There’s a 5% chance that it will be worse. But that doesn’t mean that you bail when you hit that 5% probability chance. The stress test function in Riskalyze allows you to see your portfolio when it hits a 5% probability event. Looking at this helps build credibility with your clients. They’ll trust you and follow your advice. The role of Riskalyze when working with a financial advisorInvestors can be successful with the help of an amazing financial advisor. That advisor should be equipped with the best technology to be able to explain their approach. It’s never about changing how the advisor advises—but about helping them tell their story. You get to bring your expertise to the table. Riskalyze focuses on helping financial advisors engage with clients, get clients on track, build better portfolios, and help their clients get to the other side more effectively. Aaron Klein is not affiliated with or endorsed by LPL Financial or Capital Investment Advisers.Securities and Advisory services offered through LPL Financial. A registered investment advisor. Member FINRA & SIPC.The financial professionals associated with LPL Financial may discuss and/or transact business only with residents of the states in which they are properly registered or licensed. No offers may be made or accepted from any resident of any other state. Resources & People MentionedBuilding a StoryBrand by Donald Miller Connect With Aaron KleinRiskalyzeConnect on LinkedInConnect with Emerson FerschCapital Investment AdvisersOn LinkedInSubscribe to Upthinking FinanceAudio Production and Show Notes by - PODCAST FAST TRACK