Risk in Volatile Markets

Having Co-Founded and been Chief Operating Officer for a $1billion AUM wealth advisory firm, I quickly learned to pay heed to “cash is king”.   Of course, not in terms of investing client assets, but relative to ensuring we efficiently/effectively fulfilled our client service mission in a lean and mean operation.   Simply put, we covered the firm's bills and financial obligations.  As an owner, you also quickly learn that you are last in line to be paid.   I take no issue with that, as I understand and am willing to take the risk. 

I also note more partnership attention was paid to the client’s portfolio risk (as it should be!) than to the firm’s own potential fee-based cash flow risk, during volatile periods.   After all, happy clients mean more retention and referrals effectively building asset revenue.   Current risk tools provided approaches based upon past data points.  That has its uses, but a precision built, forward risk analytical tool was not readily available at an affordable price.   I sought to incrementally assess risk for clients while concurrently examining consolidated risk for the firm and its ongoing forward revenue stream of fee-based assets.  The ability to test forward risk scenarios, as they might affect cash flow and be able to plan for it, would be impactful on many levels.  

In best practice conversations with leading advisory firm partners, they expressed concerns over the same cash flow topic while affirming the client needs.  An ability to analyze forward risk was critical to starting off investing a new client relationship's funds.   They were just as careful to emphasize the challenges of forward risk analysis.   They expressed a hoped for nirvana in what I refer to as the  “Land of If”.   Advisors shared they had significant amounts of client cash to put to work and sought a scenario based forward risk analysis tool to help explain risk to clients.  They shared it would help when they put a good solid first step forward, setting an educational and informative tone for the future relationship.   In other words, if advisors could share examples of various current (not just past stress tests) risk scenario permutations with clients utilizing cutting edge analytical tools, then they would also feel more confident putting that cash to work.   Thusly, the advisor’s confidence translated into more comfortable clients in volatile markets.    This establishes a solid foundation for all the future risk conversations.         

Risk is as deeply woven into the ability of a firm to plan and meet its own obligations, as much as it helps advisors to guide clients towards meeting their own cash flow needs.    Certainly, analytical risk tools examining the entire risk of portfolios managed by the firm and its advisors, as well as separately for clients, would be a wonderful addition.