In an industry where traditional performance reporting often falls short, leaving advisors and investors in the dark about the true drivers of their portfolio’s performance, Risk-Adjusted Attribution emerges as a critical solution. For decades, wealth managers have relied on basic performance metrics that overlook the pivotal role of risk, or have reported on risk separately from how it is impacting performance long term, leading to incomplete insights and suboptimal decision-making. The risk-adjusted attribution method not only fills these critical gaps but also addresses the long-standing pains of inadequate transparency and poor risk assessment, offering a revolutionary solution that no other firm in the industry currently provides.

Understanding Risk-Adjusted Attribution

Risk-Adjusted Attribution integrates the traditional performance attribution methods with risk analysis to provide a comprehensive view of a portfolio's performance. Traditional performance attribution typically focuses on identifying the contributions to excess return by economic sectors, investment decisions, or asset classes. However, it often neglects the critical component of risk. Our approach fills this gap by incorporating risk factors, such as volatility and correlation to the portfolio, into the performance analysis.

Why Risk-Adjusted Attribution Matters

1. Holistic Performance Insight:

Risk-Adjusted Attribution provides a more complete picture of portfolio performance by combining return and risk insights. It reveals not just how much a portfolio has outperformed or underperformed, but also how much risk was taken to achieve those results. This dual perspective is crucial for understanding the true efficiency and effectiveness of investment strategies.

2. Enhanced Decision-Making:

For wealth advisors, having access to risk-adjusted performance data enhances decision-making capabilities. It helps in identifying the sources of both returns and risks within the portfolio, allowing advisors to make more informed recommendations and adjustments. This leads to better alignment with clients’ risk tolerance and investment goals.

3. Transparency and Trust:

Investors today demand greater transparency and a deeper understanding of how their money is managed. Risk-Adjusted Attribution provides clear, compelling insights into the factors driving portfolio performance, if the advisor is staying within their risk appetite when making investment decisions, and if the advisors decisions that include higher levels of risk are actually increasing their portfolio’s value long-term, which fosters greater trust between advisors and their clients. It demystifies complex performance data and translates it into actionable insights that are easy to understand.

4. Competitive Edge:

By offering Risk-Adjusted Attribution, wealth management firms can differentiate themselves in a crowded market. This advanced level of analysis not only showcases a firm's commitment to innovation and excellence but also attracts sophisticated investors who value a deeper understanding of performance dynamics.

Leading the Industry with Exclusive Insights

While traditional performance attribution has been a staple in the industry for decades, it is only recently that the importance of integrating risk into these analyses has been recognized. First Rate stands at the forefront of this shift.

Consider a typical five-year performance analysis of a portfolio. Traditional methods might highlight the sectors contributing to underperformance or outperformance. However, they fail to explain the role of risk in these results. Our Risk-Adjusted Attribution goes further by calculating the correlation to portfolio alpha and adjusting for active risk, offering a nuanced view that highlights both the good and the bad—clearly identifying areas of concern and opportunity within the portfolio.

In practice, our Risk-Adjusted Attribution has already proven its value. For instance, in a case study from November 2021 to August 2023, a multi-asset portfolio outperformed its benchmark with lower volatility risk. Detailed attribution analysis revealed how allocation decisions reduced total risk while adding to returns, whereas selection decisions, although adding some risk, were offset by other risk management strategies.

Clients benefit from these insights in several ways including:

• Quickly identifying issues in their portfolio
• Improved communication and understanding with their advisors
• A proactive approach to managing their portfolios to optimize performance

Risk-Adjusted Attribution represents a significant leap forward in performance reporting for wealth management. It offers a more holistic, insightful, and actionable view of portfolio performance by integrating risk into the attribution analysis. As the only firm currently offering this advanced service, First Rate is uniquely positioned to lead the industry into a new era of transparency, trust, and superior investment outcomes. Contact us today to embrace the future of performance reporting with us and see the difference that risk-adjusted insights can make.