Improve financial risk management by tapping into client behavior with advanced analytics

Financial Services Writer

Nothing is more important to ensuring that your clients meet their goals than correctly assessing their risk appetite. Unfortunately, old-fashioned financial advisory tools may not be up to the task of true financial risk management, and self-assessments of risk appetite are notoriously unreliable. Advanced analytics can help.

Beyond surveys

Traditional financial advisory tools often lump clients into buckets depending on external factors such as age and asset value. A recent study in the Journal of Financial Planning found that such tools correlate strongly with the overall volatility of the stock market and may provide little real guidance on an individual's appetite for risk.

It's important for advisors to understand that "a client's appetite for risk may change in reaction to stock prices," concludes study author Michael Guillemette. "Employing a long-run strategy that reduces the temptation to buy high and sell low can be a significant source of value provided by a financial planner."

More advanced analytics can help advisors assist clients with financial risk management by going beyond surveys and self-reports. This is done by examining an individual client's behavior in terms of funding frequency, advisor interactions, trading frequency and asset allocation, which provide a much better guide to perceived risk appetite. Here are three more advanced risk-appetite indicators that advisors should examine more closely through analytics.


Psychologists have long studied how having a certain number in mind—often the first one we hear—can hold sway over our later estimates and predictions, unconsciously biasing us. In a wealth management context, clients may focus on a certain portfolio value that signals success or achievement to them, and a dip below that number during a downturn may spur panic. Advanced analytics examines client calls and emails with advisors, correlating them with portfolio performance to help pinpoint these hidden anchors. By revealing the thresholds that may trigger a client's demand to reallocate, financial advisors are better able to communicate with clients in advance to avoid instances when they start to lock in on their losses.

Career transitions

Quickly moving up the ladder in one's career can provide a big boost to a client's long-term wealth. In the short term, however, frequent career transitions might drastically affect a client's risk tolerance, as they may need to tap into greater liquidity to fund moves, provide living expenses, finance property transactions or take advantage of stock options. Analyzing the frequency of job changeover, both on a per-client and per-industry basis, will help an advisor better anticipate liquidity needs over time and allocate accordingly.

Crisis response

If there's one thing the stock market crash and subsequent downturn of 2008–2009 gave the world, it's plenty of data on investor behavior during a crisis. Investors who hold firm when the market has dipped in the past will be likely to weather future storms. Advanced analytics reveal the patterns that correlate with selling at the bottom by looking at data such as years before retirement, percent of portfolio value loss, progress toward long-term goals, and other demographic and life-period markers that may make a client more likely to rush to unwind a position. Understanding which of your clients may be tempted to sell during a downturn, and exactly when these clients choose to make that decision, helps advisors better prepare and communicate with their clients, heading panic off at the pass.

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