Totum

Frequently Asked Questions

Totum is the only multi-dimensional risk tolerance questionnaire and toolkit that helps advisors understand how much risk their clients can comfortably take based on their life situation. With Totum, you can easily customize how you engage with your clients and have in-depth discussions about their Risk Preferences, Risk Capacity, and Portfolio Risk.

Our questionnaire goes beyond simply measuring clients’ Risk Preference to consider the factors that truly make each individual unique including: goals/time horizon, career stability, industry exposure, health and related risks, local cost of living and income potential, and many more.

This risk clarity closes prospects faster, helps win additional assets from existing clients, and serves as a necessary reassurance when anyone has doubts.

Please go to this link for all details: Pricing

There are a slew of products on the market which claim to tackle the question of client risk profiling; however, the vast majority of these focus exclusively on Risk Preferences or only ask enough broad questions to recommend a generic portfolio allocation without effectively understanding what makes an individual unique.

On average a household experiences one life event a year. Totum understands these events in creating a truly bespoke solution for each client. We also think it is important to distinguish between clients’ Risk Capacity, or how much risk they can afford to take, vs. their Risk Preference, or how much risk they want to take.

Our proprietary Totum Risk Metric measures the VaR(Value at Risk). Once calculated, using portfolio returns back to 2000, the portfolio Risk Metric is mapped to a Totum Portfolio Risk Score ranging from 1-99 with descriptors from “Defensive” to “Aggressive”.

If you are familiar with the cholesterol numbers, one measures total cholesterol and another measures the bad cholesterol. Instead of using standard deviation, which measure total risk including the “good risk”, the Totum Risk Score gives more weight to the “bad risk”.

While the measure of 2 standard deviations is often used to mean 95% of the time (2 standard deviations in normal distribution covers 95.45% of the distribution).  Totum uses VaR with a 99% confidence probability.

Example, SPY scores a 40.  This means there is a 1% chance that this security may lose 40% of it's value over the next 12 months.

FINRA defines “Risk Tolerance” as “a customer’s ability and willingness to lose some or all of [the] original investment in exchange for greater potential returns.”

The prevalent practice of measuring just the willingness for risk, or the psychological tolerance is insufficient, as this can be quite different than the losses the client can withstand given their unique personal and financial situations.

To be consistent with the guidance of FINRA’s suitability rule and the SEC’s Best Interest Regulation Rule, our client risk score measures both a client’s willingness, what we call “Risk Prefernces”, and the ability, or “Risk Capacity”, to lose money for potential gains.

In order to compare the client “Risk Tolerance”, against the risk of a portfolio, we use a unified metric for both the client and the portfolio: Loss Potential. In other words, we are comparing how much the client can or is willing to lose in exchange for upside with how bad the portfolio drawdown can be in a market cycle.

For the client, it’s the lessor of their “Risk Appetite” and “Risk Capacity”. This matches up against portfolio risk where we calculate the proprietary Totum Metric, that gauges how much a set of investments might lose, given normal market conditions, in a set time period such as a day.

There are 11 questions full text and 9 questions on the mobile friendly version.  You can add your own custom questions on the full text questionnaire to learn more about a prospect or client.

The first four questions 1-4 cover the FINRA 2111 Suitability rule and the SEC Best Interest rule for client profiling

  1. Age and Income
  2. Number of people in the household and number of dependents (IRS tax breaks)
  3. Annual expenses and net worth (calculators are available in the question)
  4. Investment amount and time horizon

The next four questions 5-9 cover Risk Capacity.  Data is being used in our algorithm from the previous four questions to assess the overall risk scores and we use data from other credible resources. (scoring backed by research from Morningstar, Fidelity, and more… Totum includes three types of Risk Capacity, 1. Base risk, 2. Human risk, 3. Financial risk

  1. Location, Primary residence. Provide zip code only and check the box if you own property
  2. Career, what sector do you work in, if you are retired, select Retired
  3. Consistency of Income (over 12 months)
  4. Health (80% of the wealth in the US is owned by the age group over 55 years of age)

The last three questions 9-11 cover psychological and behavioral Risk Preferences.  Again, data is being used from the previous eight questions to assess the overall risk scores.  (scoring backed by research from multiple Economic Nobel Prize winners including Daniel Kahneman and Paul Samuelson)

  1. How much are you willing to lose over the next 12 months for future gains(slider)
  2. Flip a coin question, gains
  3. Flip a coin question, loss aversion

Totum Risk scores the Risk Preference to show the investor how much risk they are willing to take at this moment in time and scores the Risk Capacity to show the investor how much risk they should or should not be taking based on their life situation.  Totum then scores the investor’s portfolio to show them how much risk they are currently taking on a scale of 1 to 99( Baclays aggregate bond index scores a 14, less risk, and the S&P 500 index scores a 70, more risk).  The premise of the scores is to make sure the investor’s portfolio falls between the risk preference and risk capacity scores, but closer to the risk capacity because it has a longer time frame and it shows us the investors ability to take risk. (risk capacity is more in line with financial goals, is more static, is based on facts not emotions or market conditions, and on average annually every person or household has one life event that impacts their overall investment risk objective)

The Totum Risk questionnaire was built by PhD’s in the industry who utilized research from other Noble Economic Prize winning psychologists and economists.  More data was added to the methodology from leading financial institutions to build an active – client friendly risk questionnaire with a robust and compliant back end.

We are currently integrated directly with custodians, broker dealers, and other third party FinTech providers. This allows Totum to pull client account portfolios and financial information in to automatically score each security, account, and overall portfolio.

We understand that the best software is fully integrated and does not interfere with your normal workflow. For that reason we’ve developed an aggressive integration plan for the remainder of 2021.

Ease of data entry was paramount when creating Totum.

Whether you’re adding model portfolio(s) or actual client accounts, you can automatically upload them from excel into Totum by simply selecting the file(s) or select the integrations tab and then select any custodian, broker/dealer, bank, insurance firm, or third party fintech vendor.  Totum will upload all of your client account data for you.   This is then updated on a daily basis.

For a detailed answer, please see our Privacy Policy. In short, we use bank-level, 256-bit encryption, AWS security, cybersecurity with alerts, and we do not sell or transmit any of your client’s personal information to third parties without explicit consent. In addition, any information can be deleted at any time.
Yes, the SEC Regulation Best Interest Rule is the new Standard of Conduct for Brokers – more than suitability but less than fiduciary.
It requires brokers to have a Client Investment Profile before they make a recommendation and it requires brokers to record any recommendations.  Totum Risk’s questionnaire, archiving, and reporting will help protect the broker and cover this new rule.
 
Totum will provide upon request a Legal Compliance Memo stating Totum covers the regulation rules for advisors to help them stay compliant.
 
Brokers need to comply by June 30th 2020.