The COVID-19 pandemic struck the world with a blow that reverberated across borders, overwhelming public health systems, triggering labor market disruptions and financial market turmoil. While economists and risk experts scrambled to adjust their models and reassess country, sector, liquidity, and credit risk, the public scrambled for toilet paper and Clorox and tracked the pandemic in the news. Many watched as their invested retirement savings plummeted and their paychecks disappeared, all while coming to terms with a real threat to their health and security. Emotion overcame rationality for many investors, helping amplify market volatility in the months following the outbreak of COVID-19. February 24 kicked off a stock, bond, and commodity market selloff that reached a low in March with the Dow Jones Industrial Average (DJIA) down 37 percent. This was followed by a historic surge in the stock market that brings us to our uncertain present. Those who reacted emotionally during the decline may have missed out on the market recovery. 

During the global coronavirus pandemic, financial advisors face the difficult task of not only offering sound investment advice for their clients, but also counseling them through the natural emotional reactions that counter responsible investment decision-making. The challenge reinforces the findings in Capco’s 2019 whitepaper on Portfolio Analytics Strategy (PAS). The paper illustrates the importance of risk analytic tools, which leverage technology to gather, categorize, and analyze risk information in a more sophisticated way than ever before, and to deliver actionable insights for client portfolios through digital channels.

Wealth managers with a robust portfolio risk analytics strategy are better equipped to serve their clients during such turbulent markets by building trust-based relationships with clients, making risk-informed investment decisions, and freeing up advisor time to engage in meaningful conversations with clients. The current environment reinforces the case for why wealth managers should make investments in portfolio risk analytics technology.

I. Demonstrating your value as an advisor

Financial advisors can leverage portfolio risk analytics to differentiate themselves in the industry. Trust is the foundation of the client/advisor relationship. Portfolio risk analytics can be used as a powerful tool to underscore the financial advisor’s value proposition while building trust-based relationships. By translating analytics into meaningful insights, advisors can engage in more productive conversations with clients, especially in the current environment where investors may be uncertain or fearful. For existing clients, advisors can use discussions on portfolio analytics to mitigate the emotional response and frame new sales opportunities to hedge risk and strengthen portfolios. For prospective clients, advisors can use analytics to highlight shortfalls in existing accounts and offer actionable solutions that serve to maximize performance while minimizing risk. Advisors with robust portfolio analytics strategies are better equipped to protect client portfolios, capture new assets, and deepen client engagement, thereby cementing the advisor’s value proposition and creating a unique competitive advantage.    

II. Optimizing your clients’ portfolios

Portfolio analytics provides quantifiable data points to inform and reinforce investment advice. Analytics such as volatility, tail risk, tracking error, and scenario evaluations ensure that investment strategies are well aligned with clients’ risk tolerance and long-term investment objectives, preparing clients to weather a market downturn. Uncertainty and market turmoil can trigger an impulse to flee to cash, but entering a crisis with a well-aligned portfolio instills confidence to stick to the strategy and avoid the risk of exiting the market at the trough. Clients turn to their advisors in times of uncertainty and having the analytical capabilities to demonstrate the alignment of their investments with their objectives and long-term strategy can provide the necessary reassurance to remain invested. Furthermore, in a heightened regulatory environment, a well-defined, analytics-driven approach to investment advice can provide additional assurances that clients’ investment risk is being appropriately managed.

III. Attracting and retaining talent

Portfolio risk analytics can facilitate financial advisors’ success, empowering them to make risk-informed recommendations to their clients and manage risk across their book. COVID-19 has amplified investors’ stress levels and placed an increased demand for advisors to have risk-related conversations with their clients. Advisors without robust risk analytics tools face frustrations and limitations of manual risk analytics processes. Investment in portfolio risk analytics technology that brings these insights to advisors digitally will eliminate time-consuming processes and free up time to engage in meaningful client conversations that facilitate stronger relationships and drive sales opportunities. Offering a solution to advisors that saves them time and pain will help firms recruit top talent from competitors and retain talent.

Conclusion

While coronavirus’s impact on the stock market has been unprecedented and unpredictable, models can be adjusted and risk analytic tools can be leveraged to model scenarios. Leading risk analytics platforms have already begun to offer scenario analytics focused around the March 2020 market crash, as well as forward-looking analytics based on potential economic recovery paths. As of writing, markets have mostly recovered their losses for the year, but cases continue to rise and the economic outlook is far from certain. With a potential ‘second wave’ of COVID-19 infections on the horizon, advisors can harness analytics to prepare their clients for potential continued market volatility and continue to demonstrate the value of their advice.