Three Major Enhancements to Our Investment Risk Scoring Methodology
The assessment and application of risk is foundational to the portfolio design and implementation process. Risk scoring serves as an overarching guide to identify client investment goals and expectations, select appropriate investment options to support those goals and expectations, and manage an investment experience that is both comfortable and productive for the client.
Because of risk’s substantial influence on portfolio construction and client experience, Orion Portfolio Solutions has placed an increased emphasis on risk—both in terms of client risk tolerance and investment risk scoring. The effort has been spearheaded by our newly formed Investment Strategy Research Group, in collaboration with our Investment Committee.
We’re excited to announce that the collaborative effort has resulted in three key advancements in our risk environment:
Simplified Client Risk Assessment
The purpose of the risk tolerance assessment is to help advisors understand their clients’ risk attitudes, time horizons, and investment goals. With our simplified risk assessment, we’re striving to better align advisors and their clients with a more focused, client-friendly questionnaire. We use objective and subjective questions to take into consideration:
- Investment objective
- Time horizon
- Income stability
- Risk/return attitudes
- Emotional capacity for bearing risk
- Market volatility tolerance
- Ability to handle financial emergencies
Client and strategy/security risk scores are expressed as a percentage of risk of an Equity Baseline Portfolio (EBP)—our baseline diversified equity portfolio. The EBP is a blend of domestic and international market index benchmarks. We use 60% Morningstar U.S. Market Index for our domestic weighting and 40% Morningstar Global ex-U.S. Large-Mid Index for our international weighting.
The EBP benchmark is always a risk score of 100. This means a risk score of 50 would exhibit approximately 50% of the risk of the EBP. This should correlate with performance as well, meaning that if the global market is up 10% in a given period, we might expect a strategy with a risk score of 50 to rise 5%.
For the client, that creates a simple, straightforward way to understand how their portfolio is positioned and how it should perform over time, helping to avoid surprises. And if the client’s target risk score and portfolio are appropriately lined up, that should help prevent any unnecessary movement of funds in adverse market conditions, such as selling to cash in down markets.
Enhanced Investment Risk Scoring
Understanding client risk tolerances is only part of the investment equation. Putting client risk preferences into action is equally important. To help advisors accomplish that, Orion Portfolio Solutions will implement an enhanced risk scoring methodology—one that is simpler, and also more responsive to the changing market landscape.
The new risk score is calculated by two measures (33% Relative Risk and 67% Beta), across four equally weighted time frames: 1-Year, 3-Year, 5-Year, and 10-Year. Click here for a comprehensive overview of the risk scoring methodology.
The risk scoring methodology enhancements are designed to deliver a few key benefits:
- Accuracy – With enhanced risk scoring calculations, we seek to better prepare advisors to align portfolio risk with a client’s risk profile and investment expectations.
- Stability – Through the new methodology, we will moderate the impact of market risk to help ensure there are no severe jumps in risk over the short-term.
- Understanding – The simplified, globally focused, and responsive risk score, paired with a more straightforward risk assessment, promotes stronger advisor-client conversations around investment goals, time horizons, and strategies.
- Consistency – The Orion family of brands will now be unified under a single risk scoring methodology, enabling greater alignment across every advisor service and solution, from investment management to financial planning.
Refined Risk Bands
Client and investment risk scores are segmented into five standardized risk bands, created to assist portfolio management and design. These bands are being renamed in order to better represent the characteristics of the associated investment strategies, further supporting our investment team’s pursuit of instilling greater clarity into every facet of the investment experience.
|Former Categories||New Categories|
|Balanced||Growth & Income|
|Balanced Income||Income & Growth|
|Capital Preservation||Conservative Income|
Our ultimate goal is to build a more aligned investment experience and strengthen the connections between client, advisor, and portfolio. These risk enhancements are simply a vehicle to help us deliver on that goal. Through the expansion of our investment team, we will continue to work diligently to create a more valuable investment experience for advisors and their clients through improved processes, products, and services.
Learn More About The Risk Enhancements
To learn more about the coming risk enhancements, please join our investment team on July 20th at 4:00 PM EST for a live webinar overview of the new process. Click here to register.
To stay up-to-date on the latest information and resources around our coming investment process enhancements, check out the comprehensive Enhancements Resource Center. Click here to learn more.
The Morningstar U.S. Market Index is an index that measures the performance of U.S. securities and targets 97% market capitalization coverage of the investable universe. It is a diversified broad market index.
Morningstar Global ex U.S. Large-Mid Index is an index that measures the performance of Global Markets (ex-U.S.) equity markets targeting the top 90% of stocks by market capitalization.
An index is an unmanaged group of stocks considered to be representative of different segments of the stock market in general. You cannot invest directly in an index.
Beta is a measure of the volatility, or systematic risk of a security or a portfolio in comparison to the market as a whole.