FA-Mag Feature: Using Better Risk Analysis To Fight Robos


After an early career in risk management and asset allocation roles, Min Zhang, the 32-year-old co-founder of Los Angeles-based Totum Wealth, realized that designing portfolios simply based on clients’ age and income was insufficient for their needs.

“Most people my age have no interest in dealing with a human being if they can just use their age and income as parameters to build a generic portfolio,” Zhang says.

That’s why robo-advisors have grown in popularity, but clients are going to find that age and income are often not enough to build an adequate portoflio, Zhang says. “There are other factors … that create other dimensions to risk tolerance, and most people aren’t considering them,” she says.

In response, Zhang started building the Totum wealth management platform. Released Thursday, the software analyzes factors like geography, industry of employment, health, family, balance sheet and progress toward retirement in client investment proposals.

“We’re giving advisors a tool of institutional-quality analytics and with more interactivity that will allow them to answer clients’ questions,” Zhang says. “The key elements are customization and on-demand analytics. Clients already use this in their daily lives — if they want to go to a restaurant, they use Yelp. If they want to find a job or hire someone, they look at LinkedIn. Financial technology is way behind in terms of user experience and sophistication.”

Until recently, advisors have had few tools to show clients how changing their risk tolerance could impact their portfolios, Zhang says.

“We heard from an advisor whose clients wanted to go all cash during the August (2015) sell-off,” Zhang says. ”They were panicked, but she had little to convince them to stay the course. The tools advisors have today don’t really help advisors make a case for themselves. Incorporating a holistic, diagnostic approach allows advisors to up their game.”

Zhang previously served as director of investment risk management at Pacific Life and vice president in asset allocation product management at PIMCO. Zhang co-founded Totum Wealth in October 2015 with Mark Cone, former managing partner at Causeway Capital Management, a Los Angeles-based institutional asset management firm.

“If you’re a large global investor, your analytics give you a detailed idea of what type of risks you have embedded in your portfolio and what your asset liability structure looks like, but those tools don’t consider anything personalized to an individual,” Cone says. “We built a model that delves into your personal life to create a customized risk analysis.”

Clients, especially younger ones, are becoming more interested in holistic financial planning, Cone says. This growing interest coincides with the expanded availability of detailed geographic, demographic and economic data — sometimes called “big data.” Yet most financial software, even the products marketed to advisors, continues to use more simplistic equations to figure out a client’s risk tolerance and ideal portfolio allocation.

“We were stunned to find that advisors were using three, four, or five different products to do this,” Cone says. “One to calculate risk, one to research investments and one for asset allocation. They were trying to make these different programs fit together. We’ve tried to boil these sophisticated tools down to one easy-to-look-at application with a straight-forward output.”

Where determining a client’s risk tolerance is concerned, Totum overturns one assumption immediately: Instead of asking what a client would do in the case of a 10 or 20 percent correction, the platform asks at which level of losses would the client panic — 20 percent? Thirty percent? — and allows advisors to adjust the program’s assumptions accordingly.

“It’s more visceral than hypothetical,” Zhang says. “We end up with two different risk tolerances, their hardwired tolerance and their measured risk capacity.”

Totum is a technological answer for what common sense says should be true — an obese 55-year-old might not want to plan with a 40-year time horizon, while a healthy 60-year-old might need to, thus the platform considers a client’s body mass index.

“If a client prefers to be a conservative investor, but their risk capacity is aggressive, that allows the advisor to have a dialogue with the client,” Zhang says. “The client still makes their own decision, but now they can understand these different impacts in a holistic manner.”

Zhang says that the more sophisticated risk and investment management tools will allow human advisors to differentiate themselves from digital disruptors. Since the variables and algorithms tend to be more involved than the average do-it-yourself investor might tolerate, Zhang believes that robos will opt for simpler models rather than matching or exceeding Totum’s level of sophistication.

“These are things that we think advisors should be delivering to help build and make adjustments to portfolios that robos are nowhere near to providing,” Zhang says. “Robos are using a simpler model because they want to attract and process as many clients as possible. The consumer market in general doesn’t care about sophisticated analytics.”

For portfolio allocation, the application calculates the impact of new investment proposals instantly, allowing advisors and their clients to quickly compare results across different market scenarios. Proposals can be compared against current or hypothetical portfolios for cumulative return, total return, maximum drawdown, standard deviation, yield, estimated income, equity beta and risk-adjusted return.

The graphical interface also breaks down portfolio assets by sector and class to allow advisors to see where a portfolio’s risk exposure and returns are generated. Investment proposals can be adjusted for different levels of risk tolerance in real time.

“These are the kinds of numbers advisors focus on to tell compelling stories about clients’ investments,” Zhang says. “We wanted to make it flexible for the advisor to see without having to crunch the numbers.”

Totum is available as a cloud-based, turnkey, standalone application, and can also be hosted in-house and integrated into a firm’s existing wealth management platforms. The firm is also recruiting broker-dealers onto its platform and is seeking partnerships with custodians.

“We’re focused on the advisor market right now,” Zhang says. “We wanted to develop this without building the bureaucracies necessary for integrating with a larger platform. Now we’ll be able integrate with Schwab or TD, that’s something we’re working on.”

The platform is available to advisors for a free 90-day trial, after that it will cost $128 a month for one module and $248 a month for two modules.

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