Bringing Risk Into the Mix

Legg Mason is among a handful of firms revamping their wealth-management platforms to include risk management.

Thomson ONE Advisor will replace three previous providers of wealth-management, market-data and Web-content tools that Legg Mason Wood Walker, a subsidiary of Legg Mason, Inc., had deployed across its 140 offices.

Mike Abbaei, chief information and operations officer at Legg Mason Wood Walker, says the new system "will help our financial advisers to successfully focus on their clients' long-term needs."

The system provides advisers with Monte Carlo probability analysis and what-if scenario building, asset allocation, investment-analysis selection, charting, analytics and client-presentation tools.

Abbaei says the primary reason for selecting Thomson was "the efficiency of the product," and the fact that it allowed the firm to integrate different applications, including third-party vendors and homegrown products. "It's made the desktop more efficient and productive for clients," he says.

One component of the new efficiency is better risk management, gained by giving advisers the tools to properly manage their client's portfolios. Risk management, Abbaei says, is all about making sure that the financial adviser has a plan in place for the client.

Converging wealth-management tools onto one platform, including those that allow advisers to manage their client's risk, he says, "will hopefully make them more efficient." It cuts down on the manual work required to manage portfolios and frees up an adviser to spend more time with clients.

Legg Mason is not alone in its search for technology tools that help advisers manage their client's wealth. Wall Street firms are demanding better tools, and the volatile markets have them clamoring for analytics that advisers can easily deploy.

Dan Skiles, vice president of client technology consulting for Schwab Institutional, says his firm has pieced together a wealth-management platform for independent financial advisers managing high-net-worth clients. It includes portfolio-management, trade-order-management and rebalancing tools that allow advisers to reset their client's equity weightings with a key stroke. As well, advisers can create model portfolios across multiple accounts. "It's diversification based on risk tolerance," says Skiles.

One of the key tools, he says, is a "mutual-fund-rebalancer tool that we make available for models, based on the client's risk assessment. It's been out there for two years now." It works in conjunction with financial-planning tools the firm offers, which allow the advisers to tailor a portfolio suited to the tastes of an individual client. "We can then apply that information to the rebalancing tool to keep the portfolio in line."

Shaw Lively, practice leader of wealth management at Financial Insights in Framingham, Mass., says the focus on wealth-management tools used to be on client-relationship management and performance, and less about risk. That meant wealth tools looked to integrate processes like financial planning, reporting and customer-relationship management.

Now, that's being extended to include technology that helps managers monitor risk and compliance with, for example, investment policies. In effect, tools that were normally in the purview of portfolio managers are now finding their way to the adviser's desktop.

Shawn Kaplan, director of business development at Reuters in New York, which provides data and desktop applications to brokerages, says, "There are a couple of initiatives we're doing for firms that are looking deeper at communicating risk."

Reuters has aligned with risk-management vendor Barra, Inc. to provide access to Barra tools within the same system. For example, in the high-net-worth advisory market, Barra risk analytics are integrated into Reuters Portfolio Management System and Reuters Intelligent Adviser. It allows advisers to manage their clients' risk using the same system they use to watch the markets.

"In an advisory relationship, you need deeper portfolio analytics," Kaplan says. With a "bursting stock market" that jumps up and down, "people want a quantified way of measuring risk" and the Barra tools allow that, he says.

What it means for firms is a lot of training and exposing advisers to new tools. "I think we're in the beginning of this trend right now. Most advisers to the mass affluent do not have access to any kind of risk measurement. The challenge is to make it simple to communicate. Most advisers are sales people, so they need cookie-cuter types of devices," adds Kaplan.

Andrew Rudd, CEO of Advisor Software Inc. (ASI), a San Francisco-based technology company, agrees that risk management is "still a pretty advanced application for many of them (advisers)." A former chairman and CEO of Barra, Rudd founded ASI to build the next generation of adviser software tools. The vendor's investment-proposal tool was recently deployed by Barclays Global Fund Advisors for the 10,000 advisers registered at the iShares.com Web site, a portal that discusses exchange-traded funds.

Typically, he says, such tools have been made available only to institutional investors. It's all about "portfolio diagnostics," says Rudd, and understanding what the exposures are and the principle sources of risk across different asset classes.

The key to building successful wealth-management systems, says Financial Insights' Lively, is data. In order to make the proper assessments, the adviser needs access to a range of data - from the client's assets to the investment options, policies, market information and financial plans. That could include aggregating information about a client's assets held outside the adviser's reach.

Reaching such information is currently a sticking point in many operations, Lively says, because advisers either lack access to the necessary data, or the information is not integrated.

Another thing needed to successfully manage risk in an integrated wealth-management system, says ASI's Rudd. "You need to have performance benchmarks that accurately reflect what is going on." He adds that the system must also take into consideration the tax efficiency of investments so that clients aren't hit with a huge tax bill or miss out on using losses to their advantage.

Schwab's Skiles says when it comes to independent financial advisers, execution is a key component to the system. They must be able to trade in blocks of shares and have them distributed across the individual portfolios, he says.

Then, when it comes time to rebalance accounts or ditch an investment that has become too risky, it's a simple procedure and the advisers are not wasting time fiddling with administrative duties. Rather, they can focus on studying the securities in the portfolio and assessing risk.

However, technology is only part of the equation, and education is a major component to successfully merging wealth- and risk-management tools. Skiles says, from the get-go in the relationship with the client, firms need to make sure their advisers are "evaluating the client appropriately and asking the right questions. Determining the right asset allocation for the account is the first big step."

Those firms that get it right can expect to see advisers grow their client base. Academic studies show that overall portfolio performance hinges on diversification across asset classes and investment styles. As well, a broadly integrated wealth system should allow advisers to manage more accounts. By improving performance and making it more efficient for advisers to manage additional accounts, it allows them to build more successful books of business.

As for Legg Mason, Abbaei says the firm plans to roll Thomson ONE Advisor out in the first part of 2004 to more than 2,500 employees, including about 1,400 advisers.