Using StratiFi begins with PRISM, our proprietary tool to identify portfolio risk. By using PRISM, an advisor can gain a detailed understanding of the threat presented by four key sources of risk - volatility, correlation, concentrated stock risk, and tail-event risk.
PRISM is a turnkey experience that analyzes a client account, using data acquired through uploading a portfolio or linking to PRISM through a custodial platform. Once PRISM analyzes the holdings, it generates a report that quantifies the threat of four key types of risk on a client’s portfolio, as well as computing a composite risk score comprised of the four different individual scores. To simplify the understanding of the threat we use a ten point scale with 1 being no risk and 10 being very risky.
The specific focus areas for StratiFi’s risk analysis are key, as each type of risk aligns with a concrete action that an advisor can take to lower the threat. Therefore, by using PRISM, financial advisors come away with actionable investment insights that can have an immediate effect on a client’s portfolio.
Here’s a closer look at the four types of risk and how PRISM goes about calculating their respective impact on a portfolio:
This score measures how vulnerable your portfolio would be in the event of a market shock.
This score measures how correlated the holdings of a portfolio become during large stock market downturns.
Sudden and severe market losses happen. This score measures how vulnerable your portfolio is in the event of a market shock.
This score measures the vulnerability created by large individual equity positions that comprise 5-10% of a portfolio's total holdings.
To calculate the concentrated stock risk, PRISM analyzes the individual holdings and their relative concentrations, and calculates risk based on the total number of positions held and the size of those positions in comparison to the size of the portfolio.
After calculating the individual scores, PRISM then rolls the scores up into a composite score. PRISMs calculates this score by comparing the individual scores to an average, and weights the scores to ensure that a low risk score in one component doesn’t underweight risk that exists from another source.
It is our hope that PRISM will be a powerful tool to help advisors gain a deeper understanding of the risk facing their clients’ portfolios. However, knowing about risk is only part of the equation. We want advisors to use PRISM to take action, lower portfolio risk and create more positive investing experiences for their clients. Doing so could lead to greater penetration of their balance sheets, and ultimately to growth and stability of their advisor practice.
If you would like to use PRISM to help your advisory firm identify risks, click here to learn more