By Vasyl Soloshchuk, CEO and Co-Owner at INSART
2015 Totum Wealth established
2017 Company rebranded to Totum Risk and changed its focus to risk scoring
Financial Advisors, Custodians, IBD’s, Wirehouses, Banks, Insurance firms
Risk tolerance questionnaire based on academic quantitative models that provide the advisor with a compliance score
Mark Cone, Co-founder and Managing Partner
Larry Shumbres, CEO
Up until now, all risk tolerance questionnaires were based on risk preference, or how much risk a person wants to take. Totum Risk is different. Their product also scores how much risk a person can take based on their current life situation, which is called risk capacity. Using algorithm-based quantitative models that are accurate enough to hold up in arbitration, these 2 scores are weighed against the client’s current portfolio to assist the advisor in selecting the right portfolio mix.
We talked to Larry Shumbres, CEO of Totum Risk, and found out what makes their approach unique.
Larry became CEO of the company in September 2017. His previous experience includes 20 years working for such companies as IBM, Morningstar, Charles Schwab, Emoney Advisor (acquired by Fidelity Investments), and eVestment (acquired by Nasdaq).
At Totum Risk, Larry is providing new technology and bringing in aspects such as artificial intelligence (AI) and blockchain.
The new focus on risk assessment
When the company decided to shift their focus to calculating risk, the first thing they did was research questionnaires being offered by financial institutions. They visited the institutions’ websites and took their questionnaires. The result were all over the board, but one thing was consistent… all of the questionnaires calculated how much risk a person wanted to take with no questions about their current life situation. Larry says:
“Even with 20 years of industry experience, I could not figure out the reasoning behind some of their questions… So if I’m an investor filling out this questionnaire, (1) it’s based on my preference in that exact moment in time, (2) some of the questions were not clear, so I guessed at about 30% of the answers. In the end, the score is not even close to what it should be because it was based on feelings, not facts.”
The company saw that this not only confused investors, but also created problems for advisors when they tried to explain risk scores to them, so Totum set out to create a product that analyzed the risk capacity of a client’s current life situation, not just their preferences.
“Academically, we found out that every person or household has on average of one major life event annually, whether positive or negative, that will affect their overall investment objective.”
This was the “aha” moment for them. Today, Totum Risk has deep, quantitative academic models and algorithms based on hundreds of variables on the backend. However, the company was able to make the front end simple, easy, and relatable for both the advisor and investor.
“We’re asking questions about their health. What’s their zip code? Do they own property? What sector do they work in? Our client interface makes it very easy to complete the front end.”
The system processes this information to reveal the potential downside that the investors would be comfortable with and the amount of risk they’re willing to take over a 12-month period.
Sources used to obtain robust data
Through Artificial Intelligence, blockchain technology, and accredited research data companies, Totum’s models and algorithms integrate data such as zip code analytics, statistical data for metropolitan areas (e.g., gross domestic product, cost of living, median income), and the investor’s net worth into their scores.
The company has an open API and currently integrates with other third-party vendors such as Black Diamond, Advison, and Emoney. According to Larry, the platform is pulling and pushing data through APIs to seamlessly communicate with other systems and to update data.
Totum is in discussions with some firms that focus on population analytics to potentially use their data to fill in the gaps in their in-depth data analysis.
“IBM has been a huge help in this space. They have another area that they call MetroPulse which has a lot of data.”
The company aims to integrate with more and more APIs to obtain additional robust data. Larry acknowledges that they are trying to think “outside the box of ‘just FinTech’:”
“We’re thinking financial technology across the board. Not just financial advisors, but institutions, insurance companies, banks, credit unions, and companies that are looking at loans.”
Totum also intends to provide better risk assessments for credit scores. Today, a credit score is usually based on five factors. However, Larry feels that many more factors should be taken into account:
“Who are you working for? Is it a Fortune 1000 company, Fortune 100 company? How long have you been working? What field have you been working in? What’s your income? What’s your net worth? Do you have a trust fund?”
Larry thinks that these things are missed in the credit score because obtaining the information is tedious and time consuming, and credit companies are not willing to invest in the technology needed to create a more accurate credit assessment. Totum continues to expanded the number of factors accounted for in the risk-assessment algorithms.
Totum Risk is growing their integration partnerships at a rapid rate and are integrated with Fidelity, Schwab, TD Ameritrade, and Redtail CRM. The management team is in the process of also integrating with a number of independent broker-dealers, such as LPL Financial.
“We are focusing on partnering and integrating with leaders in the FinTech space, like eMoney, Black Diamond, and MoneyGuidePro; and the list goes on and on. We are also looking at the new and up-and-coming FinTech firms that we feel are game changers and disruptors in the sector.”
Larry says that the company also considers APIs that are not directly related to the financial advisory space, but can add value and benefit to advisors.
Totum Risk intends to develop several JSON APIs to enable financial advisors to integrate into the platform. The first is being tested now.
“We will have two modules, the first will provide the questionnaire and the models, along with the portfolios and scoring. The second module will have the analytics and the proposal tool.”
The company is planning to add a developer’s page to their website for other third party fintech firms to be able to review our integration process.
The company has a roadmap—i.e., a number of companies per quarter that they plan to integrate with. There are several criteria for integrating with another company:
- Totum must be able to gain revenue from, and have a market for the other company’s product.
- Integration must be seamless and the workflow efficient.
- It must be a good opportunity for both sides, and both sides must be working towards it.
“We also consider firms that do not meet the criteria, but we feel they may be a disrupter that could take a lot of market share over the next few years.”
Development team behind the platform
Larry is proud of the team the company has built. The development team includes a backend team and a frontend team. All are very experienced.
“Our backend team built the backend for the Intercontinental Exchange. They have built cybersecurity products for our government. Our frontend team, our UI and design team, have built products such as Stash, products for Mercer, a number of financial institutions. We have an all-star team.”
The backend and frontend teams consist of five people each. In addition, there is a security specialist and two client analysts with PhD degrees.
Totum Risk partners with the Websuasion Group, which mainly does design and web-development work, including updating websites, adding new pages, etc.
During our discussion, Larry highlights that in order to maintain growth the company tries to hire the right people.
“We want to hire people that are in the industry, that understand the advisors and know how they work. This could be someone who was an advisor previously and/or they were in some type work for a financial technology firm. I think that’s crucial to our business and how we want to grow.”
In addition to people with knowledge and experience in the financial industry, Larry plans to hire people who have a deep technology background and have worked on AI and blockchain. At the same time, these people need to be a cultural fit for Totum.
“That’s a very big part of hiring someone. Even if they have a great background, if they don’t fit our culture and how we work, it’s not going to be a good fit.”
Totum Risk is a small startup that tries to do things others don’t bother with. The company understands that investors’ preferences may change with time and their answers to standard risk questionnaires may vary significantly depending on their psychological state, which may change even during a single day. This is why Larry feels that calculating risk tolerance based on investors’ preferences puts their wealth in danger.
Totum’s questionnaire scores investors’ risk capacity based on their life situation—i.e., location, career, health, etc. The company integrates with a number of companies to get financial and statistical data. All data is processed through their academic quantitative models and algorithms.
Totum Risk relies on people with significant financial and technological expertise, and promising technologies such as AI and blockchain.
Vasyl Soloshchuk, CEO and co-owner at INSART, FinTech & Java engineering company. Vasyl is also author of the WealthTech Club blog, which conducts research into Fortune and Startup Robo-advisor and Wealth Management companies in terms of the technology ecosystem.