Morningstar aims to rethink risk tolerance with new tools

Pandemic related risks are, hopefully, in the rear view mirror, but the race for wealthtechs to rethink what it means to assess a client’s risk tolerance through the advancement of technology is center stage.

Advisers’ ability to rethink risk tolerance is becoming an increasing need to retain clientele. About 31% of investors with $1 million to $5 million in assets said they left their adviser because they didn’t understand their risk tolerance, according to a whitepaper by Morningstar Inc.

Morningstar jumped deep into the risk assessment game Wednesday after launching two new risk measurement tools, making it available across 7 million client portfolios via its Advisor Workstation. The tools launch at a time when debates around risk methodologies are heating up among competitors in the wealthtech arena.

The new tools, Morningstar Portfolio Risk Score and Risk Comfort Range, are a part of what the firm calls its “risk ecosystem,” said Jeff Schwantz, head of client adviser experience at Morningstar. The tools combine Morningstar’s portfolio risk data with PlanPlus Global’s individual risk tolerance methodology to give advisers and investors a singular view for scoring portfolio risk and assessing a client's risk profile and tolerance. Morningstar acquired the Australian-based fintech company last March.

The launch is the first of several rollouts this year as Morningstar will continue to integrate new methodologies, Schwantz said. Moving forward, Morningstar has plans to add mobile phone capabilities to the risk ecosystem. By August, the firm plans to roll out a feature that allows users to take a picture of a broker statement with their smartphone, upload it and instantly get their portfolio risk score.

Morgan Stanley’s Portfolio Risk platform, which launched in 2018, has provided advisers a similar product. The platform uses BlackRock’s Aladdin Risk Engine to provide users a single solution that helps to see the potential impact of historical and hypothetical market shocks on the portfolio and where the risk is emanating from overexposure in certain sectors.

While digitizing a risk tolerance questionnaire and tying it to a proposal isn’t groundbreaking, it highlights the importance of scoring in automating and creating consistency in the decision making process, said Steve Zuschin, executive vice president of enterprise technology adoption at LifeYield.

The sentiment has been shared by industry luminary Michael Kitces who hosted a webinar on Tuesday addressing what it takes to create a high-quality risk tolerance questionnaire that will serve as a useful tool for assessing a client's risk profile.

“Scoring has proven to be one of the best ways to help investors understand complex financial matters,” Zuschin said. “Firms like BlackRock’s Aladdin, HiddenLevers, Riskalyze, Totem and Rixtrema have all been using their scoring methodology to draw a line between an investor's risk tolerance and the risk in their investment portfolio.”

This has also been accompanied by a heavy debate on who’s methodology is better, Zuschin said. Market leader Riskalyze criticized competitors HiddenLevers and RiXtrema in May over differences in methodologies, alleging the use of guesswork models that produce “wildly inaccurate” results.

Moving forward, the next wave of tech advancements will be based on closer connectivity between risk tolerance and tax tools, Zuschin said.

“Risk proposals have become commonplace, and that is a good thing,” Zuschin said. “But there is little if any regard for the tax consequences that will occur when client’s asset allocation and asset location are adjusted.”