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2018 Industry Awards Winner >

A Conversation on Risk & Return

StratiFi Technologies Inc

We want to start an ongoing conversation with you about risk and return. We want to move beyond headlines, and the incessant focus on buying this fund, or selling that stock or bond. We want to get away from the perpetual speculation about what might happen if oil prices rise or fall, inflation increases, job growth is too strong, or if the Federal Reserve raises rates faster, or more aggressively, than excepted. In short, we want to focus on themes that permeate everything that we do. We plan to use the summer lull – and we hope this seasonal factor holds true this year – to focus on issues that are relevant at all stages of the market cycle, and in an investor’s life. Over the next few months, you will receive a weekly essay from us on issues that are critical to the wellbeing of your practice, and those of your clients. Afterward, we will, from time to time, send you essays on topics that are central to your practice, the market, and the financial wellbeing of you and your clients. But first we want to establish a framework, and a context. The framework is critical. It’s likely that many of your clients cannot fully articulate their key concerns due to the lack a common framework for discussing investing. We will incrementally reveal our suggested framework in each week’s edition of our company’s note, Risk and Return.

Think about that for a moment. We live in an era in which we have identified thousands of factors to measure and analyze investments, and yet many people still struggle to meaningfully address something that is increasingly important to their total well-being: investment portfolios.

Perhaps this is because we live in the age of buzzwords that reduce complexities into slogans that fit on bumper stickers. Consider defined outcome investing. If you do X, then Y, you can retire, send kids to college, and live happily ever after. Advisors exist within this construct as the financial equivalent of self-driving cars. Robo-advisors is another catchy phrase, suggesting that all anyone needs to do is use technology to take advantage of another buzzy phenomenon to invest in inexpensive financial products.

To be sure, there is some truth in all of those ideas, but they miss some key points that are critically important, especially when wealth increases, people age, or they live far longer than they anticipated. Low investment fees, for example, are important, but in reality they often obscure the fact that investors are piling into cheap beta that follows the market up and down. All of this stuff encourages group thinking about investing and what defines success.

At StratiFi, we believe technology can help people make better investment decisions. In our view, and not everyone will agree, technology is best used in conjunction with the human touch. Consider the last time you visited your doctor. Technology enabled your physician to listen to your heart, check your pulse, and analyze your blood. But the real value was generated by your physician. People want smart technology, but they need smart advisors.

To us, advisors have the great heroic role because advisors are on the front lines of the war. They fight these battles daily. We believe technology can help advisors more effectively solve problems and be a force multiplier that enables people to do more in less time. Words are powerful, and they can be made even more impactful with a visual image that shows investors how much risk they are taking to realize various returns. This is, in essence what animates our PRISM Rating software. Everyone knows their credit scores, and all sorts of other numbers that contextualize them in the world, but almost no one – at least anyone who is not an institutional investor – knows their risk score. We think that needs to change.

The nation faces a great financial literacy crisis, and an even greater retirement crisis, and we want to try to change outcomes. We want to help solve some of the most difficult, pressing questions of finance: how to define and manage risk to maximize returns in a way that is intuitive, and easy to use. We believe that part of the solution includes creating a community that is focused and engaged in conversation about these principles. If we succeed, we will witness the value of Metcalfe’s Law, which essentially states that the value of a network is proportional to the square of the number of users. The law is rooted in the telecommunication sector, but it has become a key principle of the value of social networks.

We want you to have intuitive tools that are easy to use and understand. We think this will help bring you closer to your clients by showing them how a combination of a common language, technology, and investment disciplines, all of which are embedded in software, can lead to better outcomes. We think that addressing those issues will add a degree of stability to your practice, help you grow your business, and help your clients have less volatile, more predictable relationships with their investment accounts. By defining risk, we can see returns as they truly are.

We want to help advisors become the single most valuable asset in their client’s portfolios. We think we can do this by helping advisors become risk managers and educators. Those two roles are woefully absent from the lives of most investors, and it is time to change.