Portfolio management is the process of making decisions about investments so that the investor’s goals can be achieved. The process includes the following procedures:

  1. Enable an investor to fill out a questionnaire.
  2. Determine investor profile.
  3. Build investment strategy.
  4. Offer asset allocation based on market data and gathered information about the investor.
  5. Provide ongoing performance monitoring, rebalancing, portfolio review, and adjustment.

Below, you will find a detailed analysis of these steps, some recommendations concerning related issues, and examples of implementations by existing digital financial advisors.

Questionnaires and Investor Profiling

Enabling an investor to fill out a questionnaire is the first essential step that allows the financial advisor (human or digital) to get to know the investor. The more information the system receives, the more accurate the investor profile it will build and the more relevant the investment strategy it will develop.

When answering the questionnaire, the investor shares information about the following:

  • Their financial circumstances, goals, and time horizon*;
  • Their risk tolerance** and investment experience;
  • Their investment preferences.

To obtain accurate answers, the questions should not be highly specialized. For example, inexperienced investors not familiar with financial terminology are unlikely to be able to give useful answers to questions such as “How much volatility are you willing to take for ‘X’ return?” because they will not understand what this means for long-term investments, and will assess the possible risk incorrectly.

To identify suitable questions for such investors, the following techniques may be used:

  • Provide examples so that the investor can better perceive the real situation.
    Vanguard uses the crisis of 2008 to help investors understand or remember the facts:

    Vanguard questionnaire

  • Visualize possible results to help the investor see the possible, most dramatic, and best alternatives.
    E-Trade uses line graphs:

    E-Trade questionnaire

    Wealth Management LLC offers bar charts:

    WealthManagement LLC questionnaire

    Charles Schwab provides tables:

    Charles Schwab questionnaire

  • Use details and explanations so that the investor can clearly understand the exact meaning of each choice.
    Merrill Edge explains the meaning of certain terms and offers detailed explanations:

    Merrill Edge questionnaire

    E-Trade offers additional clarifications to ensure the investor does not overlook important facts:

    E-Trade questionnaire

Questionnaires offered by existing advisory platforms to users vary greatly. While Betterment asks clients to fill in just three fields (age, annual income, retired or not) and choose from predefined goals, the questionnaire of Wealth Management LLC  contains 18 questions to analyze investment objectives, income needs, time horizon, and risk tolerance.

B2B financial platforms such as AdvisorEngine enable investment advisors to create custom questionnaires.

A comprehensive questionnaire allows the system to obtain a detailed investor profile and deposit all information about the investor in a database. Parameters in the profile are then rated to define the investor’s risk profile. There is no universal categorization of risk profiles; usually they are divided into several categories, from conservative investors, who seek stable growth of their capital value with low risks, to aggressive investors, who are prepared to expose their investments to greater risks in order to maximize capital growth.

For more information about building an investor profile, read the “Risk Profiling” chapter.

Investment Strategy

Once the investor’s profile is ready, an investment strategy may be built. This is based on the investor’s financial goals, time horizon, and risk tolerance, and may vary significantly for different investors, or even for different investor objectives.

The investment strategy does not offer exact examples of asset allocation, but includes recommendations on asset class selections suitable for the investor. The suggested mix of asset classes*** typically includes stocks, bonds, and cash; commodities and real estate are seldom suggested by digital financial advisors.

The investment strategy should contain guidelines on rules and procedures, and warnings against potential conflicts of interest that might arise from certain allocations.

When building an investment strategy, the following principles should be applied:

  • The strategy should match the specific investor’s profile in terms of goals, time horizon, and risk tolerance. For example, it is unreasonable to recommend a portfolio with 80% stocks to a risk-averse person who wants short-term preservation of capital and does not expect to achieve high returns.
  • The investment strategy should include the following explanations:
    • The strengths and weaknesses of the strategy. This is required to maintain the investor’s confidence during periods of low performance.
    • Investment benchmarks. This knowledge allows the investor to measure the efficiency of the particular investment strategy compared to market conditions and the investor’s goals.

Examples of investment strategy patterns offered by financial institutions are as follows:

Charles Schwab:

Charles Schwab investment strategy

Merrill Edge:

Merrill Edge investment strategy


Vanguard investment strategy

Digital tools build investment strategies based on algorithms that translate the investor’s data into recommendations. A poorly designed or poorly coded algorithm may result in a strategy that is irrelevant to the investor’s goals, risk tolerance, or time horizon. Creators of digital financial advisory systems should consider the following:

  • The advice tool that provides investment recommendations should comply with regulatory requirements.
  • The algorithm used to build investment strategies may need to be tested on a regular basis to ensure it remains appropriate as market conditions change.

B2B financial platforms may provide tools that allow financial advisors to use their own algorithms to build investment strategies. In this case, the advisor should have tools to test whether the algorithm has been interpreted correctly by the system, and to ensure the outputs comply with the advisor’s expectations.

Bottom Line

Above, we have discussed the first three steps of the entire portfolio management process. The next step, i.e. asset allocation, will be more closely discussed in the following article.

* Time horizon is the length of time over which an investor expects to hold their investments.

** Risk tolerance is the investor’s attitude to risk and their willingness to absorb potential loss.

*** An asset class is a group of investments that have a similar financial structure, are subject to the same rules and regulations, and tend to show similar behavior in the marketplace. Investments are often divided into the following asset classes:</p?

  • Stocks (also called shares or equities) are securities that signify ownership in a publicly held company. Stocks may outperform other asset classes over long periods and have high volatility in the short term.
  • Bonds (or fixed-income investments) are securities that represent corporate or governmental debt obligations. Bonds usually provide steady income based on interest rates and are regarded as safe investments in both the long and short term.
  • Cash assets are investment securities that have low risk and are repaid in the short term (often less than a year). Cash investments usually offer better return than interest rates paid by banks. They are suitable for short-term investing.
  • Real estate (or property) comprises land and buildings. The value of real estate greatly depends on its surroundings and geographical area. Though real estate may provide a predictable income stream, regulatory rules differ across regions, making it a complicated investment option.
  • Commodities (physical goods) represent another complicated investment option that is not offered by financial platforms.

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