The war for risk analysis gets ugly

The battle for risk analysis dominance took a nasty turn last week when market leader Riskalyze Inc. blindsided competitors with a campaign alleging the use of guesswork models that produce “wildly inaccurate” results.

A dedicated website cheekily named unhiddenlevers.com and a newly minted white paper added to the onslaught, in addition to a short video calling out HiddenLevers co-founders Raj Udeshi and Praveen Ghanta for naming a coronavirus-related risk scenario “Kung Flu.”

“If you’re going to make predictions, you’d better be accurate when your clients’ future is on the line,” the website reads.

Sadly, the aggressive campaign was heavy-handed and widely missed the mark. CEO Aaron Klein has since tamped down the ads and said he regrets referring to specific companies by name.

After years of praising Orion Advisor Solutions and its CEO Eric Clarke, the real catalyst behind the campaign might have been Orion’s recent acquisition of HiddenLevers in March. 

Keep in mind, the turnkey asset management provider is a major platform with big-ticket clientele like The Carson Group and Focus Financial. With Orion’s backing, HiddenLevers will certainly ramp up efforts and expand its profile. The technology is backed by a staff of more than 20 chartered financial analysts, two behavioral finance PhDs, and roughly six CFPs, Clarke wrote in an email.

Perhaps, Riskalzye was simply feeling the heat.

To be fair, Riskalyze dominates with a 25.8% market share, according to an adviser software survey. By comparison, HiddenLevers has just 1.6% of the market and another firm mentioned in the ads, RiXtrema, has less than 1%. 

Questions remain, however, about the validity of the allegations lobbed at HiddenLevers. The predictive guesswork model that it uses makes assumptions about what will happen in the stock market and models the impact on a portfolio if those estimates are correct. According to Riskalyze — which uses a historical data model that calculates a range of probabilities based on actual risk in the underlying securities — any model that is not historical in nature is fundamentally flawed and perhaps even a fiduciary risk. 

As long as models take in adequate data and accurately describe the data to clients, the methodology shouldn’t really matter, according to an expert from the wealth management consulting firm Aite Group. Most models will fall within a certain target accuracy range, meaning most will have hits, misses and close calls. Risk models are just guidelines and most clients will readily understand that.

After all, predictions about market performance are about as reliable as weather forecasts. 

HIGHLIGHTING METHODOLOGY

Like other wealth management debates, there is likely real value in both approaches, and advisers should have the ability and the option to decide which methods are best suited for their practice. 

The ad campaign did accomplish the goal of highlighting methodology — and it’s a worthy discussion to have. After all, advisers need to be aware of the underlying technologies that support their desktop tools to make sure they’re best serving client needs. Unfortunately, there’s probably not enough long-term evidence to effectively determine which model reigns supreme, according to experts. 

While it’s too early to tell if the marketing campaign will bolster Riskalyze’s position in the market, it did start a healthy discourse. What’s going on under the hood of new technologies is important for advisers to understand in order to make sure the tools are best suited for clients.

Hopefully, next time, we’ll get there without all the drama.