What is Totum?
Totum is the only risk tool that helps advisors understand how much risk their clients can comfortably take based on their life situtation. 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.
What problem does Totum solve?
While advisors have begun to embrace technology, realizing that there are a number of solutions that can dramatically improve the efficiency of their practice, there are still some areas lacking clearly superior technological solutions.
Totum revolutionizes the risk profiling experience by employing a thoughtful yet concise questionnaire to gather the data necessary for our complex, quantitative risk model.
The multi-dimensional risk clarity saves advisors time by expediting a deeper investment and planning conversation.
How is Totum different from other products on the market?
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.
How do we look at portfolio risk?
Traditionally, standard deviation has been one of the most prevalent measures of risk in investment management. While it is a valid measure of a portfolio’s total volatility, since market and portfolio returns are not normally distributed, relying purely on standard deviations may underestimate the potential for loss.
Comparing normal distribution with the historical return distribution of a number of indices illustrates that the actual distribution has a fatter left tail. In other words, large negative returns happen more often than what standard deviation would indicate.
This is the driving reason behind our creation of our proprietary Totum Risk Metric.
What is behind the Totum Risk Score?
To improve the classic risk metric of standard deviation, we augment it with downside deviation. Downside deviation comes from the Sortino Ratio, which is an improvement to the more renowned Sharpe Ratio. Downside deviation measures both how bad the losses can get and how frequently they happen.
However, using only downside deviation would throw away the upside volatility that captures the “potential returns”, or the reward for taking the risk.
Our proprietary Totum Risk Metric measures potential downside. 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 “Levered”.
How can I explain the Totum Risk Score?
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), you can think of the Totum metric as one standard deviation plus one downside deviation, or how much the portfolio can lose during a usual market downturn.How does
How does Totum measure Client Risk Tolerance?
FINRA defines “Risk Tolerance” as “a customer's ability and willingness to lose some 2 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, 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.
How is client Risk Tolerance and Portfolio Risk comparable?
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 Risk Metric, which that gauges both the total volatility and the downside potential of the portfolio.
There are a lot of questionnaires out there, what's different here?
There are a lot of questionnaires out there from robo-advisors to robo-hybrids, there is no doubt about that. Unfortunately, a lot of them are woefully inadequate in that they are only addressing one aspect of risk at any given time. Some are only considering a client’s appetite for risk and others are purely looking at potentially investments based on a timeline until retirement.
The questionnaire from Totum allows you to assess a client’s risk from both a Risk Capacity and Risk Appetite perspective at the same time in a truly holistic way.
How can so few questions give a holistic risk score?
Questionnaires don’t need to be long to give an accurate assessment of what makes a client unique. In fact, a longer questionnaire actually becomes problematic if clients don’t have enough interest to make it all the way through, which undermines the entire process. We carefully selected these questions as the bare minimum inputs for our model as well as gathering enough information to help you start an intelligent planning conversation.
In the future, we will be adding to this questionnaire to further delve into the unique aspects of each client’s life, which will give an even more comprehensive and accurate risk score. These additional questions; however, will be optional and up to the client’s individual willingness to share and level of interest.
By adding gamification, like educational prompts about why it behooves the client to complete additional questions, we will be able to drive clients to give you a more complete view into their life and unique challenges that should be considered in a financial plan.
Why not just use the last 5-10 years of data?
This return period (2000 – last month end) is chosen intentionally for understanding long-term loss potential and recovery during different economic and interest rate regimes. This time period captures two complete stock market and economic cycles, as well as both rising and declining inflation and interest rate environments.
As we are not always able to predict the interest rate and equity market environment going forward, it’s prudent to consider the return and correlation characteristics of all four scenarios when advising clients with a long-term investment strategy.
What happens if a security didn't exist during a given time period?
If the inception date of a security is after the period in question, the time period prior to inception is replaced by an ETF that tracks the asset category of the security. An asset category is largely based on stock industry sectors or domicile if the security is a stock, or Morningstar Category if the security is a mutual fund or ETF, and is a more granular categorization than the broad asset class.
The ETF selected usually has the longest history, the best liquidity and the lowest expense ratio. If the ETF that represents the asset category also started after the given time period, then the period prior to the ETF’s inception is replaced with the index returns of the asset class that the security belongs to.
How can Totum be integrated with my current systems?
We are currently integrated with data aggregator Yodlee and directly with custodians, broker dealers and other third party FinTech providers. These allow you to pull client financial information, from bank accounts to held-away accounts, directly into Totum with the click of a button.
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 2017.
The most obvious next step is with Client Relationship Management tools (Redtail, Orion, Salesforce, etc). Further integrations in 2017 will look to include direct custodial feeds, trade and rebalancing software, portfolio management platforms, and more.
Is there an automated way to gather client data so I don't have to input it manually?
Ease of data entry was paramount when creating Totum.
Whether you're adding model portfolio(s) or actual client accounts, you can automatically upload these from excel into Totum by simply selecting the file(s).
Prefer something even more straight-forward? You can use the power of our data aggregation partner, Yodlee, to pull clients’ data directly from financial institutions and custodians into Totum. We also have direct data feeds from custodians, broker dealers and third party FinTech vendors.
How can I be sure my clients' information is safe, secure and private?
What are some more technical stats I might want to know?
Our cloud-based (SaaS) product is accessible across all devices and optimized for mobile (app coming soon)
Flexible architecture and modularized APIs
Intelligent stack: node.js and angular framework delivers real-time, visually stunning feedback of complex analytics
256-bit Bank Level encryption
Tell me about the team, what relevant experience do they bring to the table?
Larry Shumbres is CEO of Totum Risk. Larry is an accomplished financial sales executive with over 20 years of experience in the financial and technology markets. He has a keen eye for "what's next" in FinTech and investment products and has a passion for sharing this knowledge with his clients and developing significant market share. He has a strong track record of producing positive long-term results for his clients which have included major financial institutions, independent broker dealers, custodians, financial advisors and high net worth families. Larry received his B.A. in Law from the University of Pittsburgh. As a defensive back for PITT's football team, he developed leadership skills, team loyalty, and a strong drive to succeed that has continued to be valuable throughout his career. After graduation, he quick advanced within prominent financial and technology corporations including Charles Schwab, Morningstar, New York Life, eMoney and eVestment. When he puts down his technology, he enjoys spending time with his wife Jodi and their two children
Michael Zenaty is Head of UI/UX of Totum Wealth. Michael brings over 5 year of design experience for web, mobile and desktop applications, with multiple products shipped that interface millions of users. Prior to joining Totum, Michael was Product Designer at Sophia Learning, Art Director at New Generation Agency in Paris, France, and UI/UX Designer and Front-End Developer at Basika, an e-commerce site. Michael earned a degree in Design and Visual Communications at ITECOM Art Design. His work has been featured in Computer World, Advanced PS, Best UX Design, and Illustrator Mag, selected as Site of the Day by Awwwards and FWA, and twice Webby Award Nominee.
Min Zhang, CFA Co-founder and on the Board of Totum Risk. Min brings over 10 years of institutional investing experience to transform wealth management. Previously, Min was Director of Investment Risk Management at Pacific Life and VP in Asset Allocation Product Management at PIMCO. Min also worked at Causeway Capital to create quantitative equity strategies, and at Nutmeg.com to build automated recommendation algorithms. In addition to fintech, Min is passionate about causes that help build human capital, including education, mental wellness, entrepreneurship, personal development, and reducing inequality. Min earned an MBA from Stanford Graduate School of Business and a bachelor’s degree in Computer Science and Economics with Honors from Dartmouth College. Min was selected as a Women Worth Watching 2016 Award Winner by the Profiles in Diversity Journal, and Top 10 to Watch in 2017 by the Wealth Management magazine.