Risk Monitor Policy Guidance

What is the Risk Monitor Policy?

Mutual Advisors, LLC (“Mutual”) requires that every client be taken through a Risk Assessment Questionnaire (“RAQ”). The RAQ is designed to assess a client’s emotional response to risk, which is important to understand as their emotional response is not always aligned with their stated investment objectives. The result of the RAQ is considered the client’s Risk Tolerance (or Loss Tolerance) and is taken into consideration as part of a comprehensive understanding of a client’s financial needs and goals.

How does Mutual monitor for risk? 

Mutual utilizes Orion Risk Intelligence (“ORI”) to monitor client portfolio risk. For purposes of risk monitoring, a portfolio is defined as all accounts assigned to a particular household in Orion. ORI assigns each portfolio a potential loss, which equates to the worst-case scenario based on the scenarios the portfolio is run against. Mutual runs all portfolios against a series of five scenarios, which are outlined in the Orion Risk Intelligence Scenario Guide for Mutual. The potential loss is compared to the client’s risk tolerance to determine which portfolios need to be flagged for review. (Click here to learn more about the calculations involved in this process.)

What happens if a client is flagged for review?

Each advisor that has clients flagged for review will receive a spreadsheet report which lists the clients that were flagged, their Orion household ID, their risk tolerance, the date of their risk tolerance, their current potential loss and worst-case scenario, and the average variance and whether it they are over or under risk. There are two questions, outlined below, that an advisor needs to answer that help document why a portfolio may be out of risk and whether the client is aware that their portfolio is over or under risk. If any clarification is required, Compliance will reach out with additional questions. Otherwise, the response will be notated. Certain responses will prevent the portfolio from being flagged again for 2 or 4 quarters, as outlined below. 

Questions for flagged client portfolios:

1.      What is the reason for the portfolio being out of tolerance?

[Pick List:

·        Client needs to take an updated risk assessment

·        Portfolio is managed around outside assets (deferred for 4 quarters)

·        Legacy or non-managed assets that are impacting risk (deferred for 4 quarters)

·        Tactical over/under-weighting of investments (deferred for 2 quarters)

·        System is not properly reflecting the client’s risk tolerance]

2.      Is the client aware that their portfolio is not fully in line with their stated risk tolerance? [Yes/No]

NOTE: If an advisor believes that a client’s potential loss being generated by the system or that the risk tolerance being shown is incorrect, an advisor would answer #1 as “System is not properly reflecting the client’s risk tolerance” and #2 as “No”. Mutual will do a detailed review of the client’s portfolio in ORI to determine the source of any potential issue for the client portfolio.