By: Neerja Caprihan
Risk is a part and parcel of our lives. ISO 31000 defines risk 1 as “effect of uncertainty on objectives”. It affects anything and everything that is prized by us and needs safeguarding against harm or loss. As such, it covers a wide range including not just finances, but health, family, safety, assets, stability, resources, environment, belief-systems, in short our overall well-being and progress as an individual, society and well, people.
At the same time, scores generally provide a relative way to gauge a participant from amongst many, and therefore drive one or more of outcomes related to eligibility, decision-making, accomplishments and more commonly, competitions. Be it in education, sports, business, or finance.
Interactive Advisors (IA) uses risk scores to facilitate investment strategy matches between a client and a portfolio offering. To begin with, each strategy on the platform is analyzed to determine a risk score for the associated portfolio. IA then assigns a risk score between 1 (least risky) and 5 (most risky) to each portfolio after monitoring its strategy, adherence to stated objectives and quantitative measures of risk. The purpose of the risk score is to ensure that the portfolio risk is in line with client expectations and meets Interactive Advisors’ fiduciary obligation to recommend suitable investments for clients.
Next, IA profiles clients using a risk questionnaire to ascertain their suitability, using the same scale of 1 to 5. This is done to ensure that clients have access only to portfolios that are suitable for them, keeping in mind their risk tolerance, capacity and investment objectives. This risk assessment/ suitability questionnaire takes into consideration clients’ financial situation, annual net income, estimated liquid net worth, age, investing knowledge, investment horizon, tolerance for stock market drops, and attitude towards the trade-off between risk and return in connection with Interactive Advisors investments. Risk scores are then calculated for clients based on their answers to this questionnaire. Clients can update their responses to the risk assessment questionnaire on their dashboard at any time to reflect changes in their personal circumstances.
Finally, Interactive Advisors matches up clients’ assigned risk scores with portfolio risk scores in accordance with a proprietary risk scoring methodology. Based on the risk score assigned by IA, clients may invest in one or more of the portfolios or strategies that have risk scores equal to or lower than the client either on their own or with the assistance of IA’s client service representatives.
IA also recommends the Asset Allocation portfolio based on a client’s risk score. Clients are free to accept or disregard this recommendation and proceed with their own portfolio selection based on the risk score. Or they may customize our standard AA portfolio recommendation to increase or decrease the allocation to specific ETFs or apply industry tilts.
Still have a question? Read the documentation or simply give us a call!
PHOTO CREDIT: https://www.shutterstock.com/g/GoodStudio
VIA SHUTTERSTOCK
FOOTNOTES AND SOURCES:
1 https://www.iso.org/news/ref2263.html
DISCLOSURES
Interactive Advisors clients are and remain responsible at all times for advising Interactive Advisors of any changes in their financial situation, investment objectives, risk tolerance and investment restrictions.
Past performance is no guarantee of future results, nor is it indicative of future performance. All investments in financial markets involve risk, including the risk of loss, such as a loss of principal and reduction in earnings.
The content of this page is offered for informational purposes only, does not constitute investment advice, and is not an offer to buy or sell any security or invest in any of our portfolios.
For more detailed disclosures, please review our Legal Disclosures webpage.
