Risk Monitor Calculation Guide

Important Terminology:

·        Risk Assessment Questionnaire (“RAQ”): This is a series of questions that the client answers to help identify their emotional response to risk. Mutual Advisors, LLC (“Mutual”) leverages a standard 10-question questionnaire that was originally designed by Orion Risk Intelligence (“ORI”; formerly known as Hidden Levers). (For information on other approved RAQ tools and how they are processed by Mutual, see Other Risk Assessment Systems.)

·        Risk Tolerance/Loss Tolerance: Based on the responses to the RAQ, the client is assigned a risk tolerance score. This score identifies the degree of variability in investment returns that a client is willing to take, or their emotional response to investment risk.

·        Risk Levels: Mutual has five risk levels from low to high. They cover the risk score range in ORI of 0-50.

·        Investment Objective: A client’s investment objective is the specific financial goal or purpose for which they are investing. Mutual has five investment objective options:

Preservation: Preservation of capital

Conservative: Preservation of capital and income

Balanced: Income and growth from a blended portfolio

Growth: Pursuit of growth or potentially higher returns

Aggressive: Aggressive pursuit of growth or potentially higher returns

·        Investment Objective Score: Each investment objective has been mapped to a score that equates to the midpoint of one of the five risk levels. The five Investment Objective Scores are:

·        Potential Loss: The scenario-based score for a client portfolio that is attributed to the worst-case scenario of the scenarios selected by Mutual. Information about the scenarios used are outlined here.

·        Client Portfolio: All of the accounts included in a single household in Orion.

·        Variance: The percentage of difference between the client’s risk tolerance and potential loss.

·        Variance Drift Range: The range in which a portfolio’s average variance is allowed to drift before a client portfolio is flagged for review. Any portfolio that is equal to or greater than 75% (over risk) or equal to or less than -75% (under risk) is flagged for further review. Clients who have lower risk tolerances will be flagged for smaller shifts in their portfolio potential losses than those that have higher risk tolerances. This allows clients with higher risk tolerances to have a higher degree of volatility in their portfolio before potentially being flagged for review.

Risk Monitor Calculations

Below are descriptions, formulas and outlines for the two key calculations used in the risk monitor review process.

Variance Calculation

Risk tolerance is considered as a part of a client’s financial profile and is often looked at in connection with a client’s investment objective. Therefore, Mutual’s variance calculation is based on a weighting of 70% of the difference between the Potential Loss and the Risk Tolerance, and 30% of the difference between Potential Loss and Investment Objective Score.

Example:

Client Risk Tolerance: 40

Client Investment Objective: Balanced

Client Potential Loss: 10

Formula:

Variance = (((10/40)-1)*0.7)+(((10/25)-1)*0.30) = -71%

Negative percentage indicates a portfolio is under risk.

NOTE: Because there was disparity between the client’s risk tolerance (Moderately High risk level) and their investment objective score (25), the objective weighting helped to reduce the calculated variance of the portfolio. If the investment objective was not factored, the risk variance would be -75% instead of -71%.

Average Variance Calculation

Every risk monitor system is designed to score a portfolio at a single point in time. During periods of greater volatility in the markets, it becomes important to assess risk in an actively managed portfolio over a longer period than one day. Therefore, Mutual reviews all portfolio variances based on a rolling four-week average.

Example:

Client Risk Variance on 7/1 = 84%

Client Risk Variance on 7/8 = 75%

Client Risk Variance on 7/15 = 63%

Client Risk Variance on 7/22 = 55%

Formula:

Average Risk Variance = (84%+75%+63%+55%)/4 = 70%

NOTE: Based on the variance drift range used to flag client portfolios, if the portfolio was only looked at based on the scores on 7/1 or 7/8, the client portfolio would have been flagged for being over risk. Since an average of all four weeks was used, the client would not be flagged for being over risk.