Software tools test portfolios under different world scenarios

They help advisers customize individual portfolios, and can aid in the client conversation

Feb 27, 2014 @ 12:01 am

By Joyce Hanson

software, stress test, technology, investment management
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As advisers seek technology that helps them efficiently scale their practices, a growing crop of software products is helping advisers stress-test macroeconomic risks in client portfolios.

Jim Koch, founder and principal of registered investment adviser Koch Capital Management, believes stress-testing software is akin to tailor-made pharmaceuticals that target individual patients for specialized treatments.

“The way medicine is customized for each patient, we're going that way in the portfolio world,” Mr. Koch said.

Whether it's the upheaval in Ukraine, a record drop in gold prices or suddenly spiking inflation, stress-testing software lets an adviser see how world and economic events affect an individual's portfolio mix.

(See why more advisory firms are adding a chief risk officer.)

The three serious players in the macroeconomic stress-testing space that target advisers are MacroRisk Analytics, the oldest product on the block, three-year-old HiddenLevers and the newcomer, RiXtrema, said Michael Kitces, partner and director of research for Pinnacle Advisory Group and writer of the Nerd's Eye View blog.

“They seem to go in different directions,” Mr. Kitces said. “HiddenLevers has spent more time on its software's graphical interface for advisers so they can make it appealing to clients, whereas MacroRisk Analytics is more in the other direction of trying to build something for the adviser constructing a portfolio.

(Don't miss: The surprising hidden value of automation)

“RiXtrema is brand new, and it looks like it is closer to the MacroRisk end than the HiddenLevers end, which is 'here's how to construct a portfolio' as opposed to 'here's what to show clients,'” he said.

Time-tested MacroRisk Analytics started in 1999 to examine 18 macro-risk factors such as the gold index and consumer prices, to measure how the economy influences investments. HiddenLevers, which is now gaining traction with broker-dealers including Raymond James Financial Inc. and LPL Financial, offers an infographic-rich toolkit of scenarios. And Rixtrema proposes to protect client portfolios with a “crash testing” tool for advisers.

Patrick O'Connor, senior vice president of wealth, retirement and portfolio solutions at Raymond James, said the HiddenLevers stress-testing tool empowers advisers to have a conversation with clients to address their behavioral finance biases.

“Now we can put some numbers to the page and say, 'What if there's a political event in the Middle East? How would that affect the portfolio?'” he said.

The microanalytic software Mr. Koch traditionally has used for stress testing includes his own Monte Carlo simulations in Excel as well as the portfolio microanalytics that Morningstar Inc. and Quantext's Portfolio Planner provide. Those products generate projections of risk and return to help diversify a portfolio and correlate the performance of securities.

But more recently, Mr. Koch has started using the macroanalytic software from HiddenLevers and RiXtrema to help determine retirement income and to engage in productive conversations with clients.

Rick Kahler, president of registered investment adviser Kahler Financial Group Inc., was an early beta tester of HiddenLevers and currently uses it because it helps him bring quantitative facts into what can otherwise be emotional client conversations.

“I can't see a direct effect on my bottom line, but when I'm sitting with a client who says, 'Maybe I should get out of the market if inflation goes up,' I'll say, 'OK, let's bring up your portfolio and see what inflation would do to it,'” Mr. Kahler said.


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