Fintech Insights: How to Turn Risk Into Revenue with Modern Analytics

Key Takeaways:

• Legacy risk models are dangerously outdated—they underestimate the frequency and severity of extreme market events, creating client mistrust and enterprise-level risk.
• Expected Tail Loss (ETL) is the metric that matters—it shows the real impact of those “worst 5% scenarios,” aligning portfolios more closely with client expectations.
• Amplify’s proprietary risk scoring tool, QuantumRisk™, can help advisors turn risk insights into opportunity, giving RIAs the ability to model millions of outcomes in real time, communicate transparently with clients, and differentiate their firms.
• The business case is clear—modern risk tools that properly account for ETL may help drive firm growth, improve client retention, create operational efficiencies, and increase enterprise value.

Why miscalculating risk is bad for business

Most wealth management firms rely on legacy risk models such as standard deviation or Value-at-Risk (VAR), which attempt to address the question of risk through a quantile of a probability distribution. These methods do tell you where the risk zone begins, but they don’t tell you what happens in the worst 5% of scenarios (i.e., the tail)—those extreme market events that are becoming more frequent (think 2007-2009 financial crisis, COVID-19 pandemic, etc.).

As an enterprise, what’s going to happen if your risk model misses the next high-impact event? Clients affected by those worst-case scenarios will lose confidence in your firm because the risk they actually took on was misaligned with their expectations. Along with lost confidence, these scenarios could further snowball into mistrust, attrition, loss of AUM, and damage to your brand as a whole.

How bad are legacy risk models at gauging the probability of extreme market events?

Traditional backward-looking risk models (Gaussian, standard deviation, VaR)—which most risk platforms rely on—put investors at risk because they grossly underestimate the probability of extreme events occurring. Just how inaccurate are these models?

According to Amplify Director of Investment Research Ron Piccinini, Ph.D., “Take the Covid-19 sell-off as an example. What is the probability of a 30% move over a 22-day period occurring in the future? The Gaussian model estimates the probability to be once every 33,956,653 years. Heavy tail risk models are much more realistic, showing a probability of once every 37 years.” Heavy-tail risk models tell the full story. It’s time for legacy risk models to R.I.P.

Moving forward: Why ETL is the metric that should matter to RIA firms

Expected tail loss (ETL) is a calculation that reveals how much a portfolio is likely to lose in the tail—those 5% worst case scenarios. Enterprises that want to protect what they’ve built and grow in today’s volatile world, need a risk model that actually accounts for tail risk—the potential for considerable loss in extreme market conditions.

Those black swans can have a significant impact on investment losses and a client’s investment portfolio over a short period of time, but legacy risk models simply don’t account for them. Clients deserve better.

Most risk models that do account for tail risk don’t go far enough

While some modern risk models do consider heavy-tail risk, few account for the magnitude of that risk or its potential impact on a specific investment or market sector. Alternatively, Amplify’s proprietary risk engine QuantumRisk™ takes a modern approach to risk.

Based on Dr. Piccinini’s pioneering research in “fat tail risk” modeling, QuantumRisk calculates risk in real time—including those 5% worst case scenarios that other risk models ignore. QuantumRisk is different because it:

• Uses tail-risk modeling with modern analytics built for today’s markets.
• Relies on real-time simulations—modeling millions of real-world outcomes in less than a second—instead of backward-looking, static assumptions.
• Embedded in the Amplify Platform, the QuantumRisk widget provides a transparent risk score illustration that RIAs can easily communicate to clients.

The business case for a risk model upgrade that accounts for ETL

History has shown that legacy risk models fail to predict the frequency and intensity of the extreme market events that occur in the tail. What if your enterprise’s advisor platform had a risk model that could? Here are four ways your organization could potentially benefit:

No. 1: Accelerate Firm Growth

With advanced risk tools at your disposal—tools that make it easy to calculate and communicate risk in real time—RIAs would be able to clearly show prospects how misaligned their current investments are compared to their capacity for risk. Our clients who utilize QuantumRisk tell us those are some of the highest converting conversations their firms have ever had.

No. 2: Support Client Retention

What if you could create client portfolios with realized swings that match a client’s psychological and financial capacity? Clients would have the confidence to stay invested in their plan in times of market stress, minimizing behavior-gap drag. This alignment—made possible by QuantumRisk’s real-time risk scoring model—puts clients’ minds at ease and reinforces trust, which is essential for a strong retention game, not to mention referrals.

No. 3: Improve Efficiencies

When risk scoring, rebalancing, and reporting are automated, which is the case with QuantumRisk, RIAs and their support staff spend less time on administrative tasks. This provides the entire team with more quality, client-facing time—critical for retention and increasing wallet share—and more time to invest in new client acquisition.

No. 4: Build Long-Term Firm Value

If succession planning is on your mind, how your tech stack stacks up will be critical for valuation. Investors and M&A firms place a higher value on RIA firms that use modern technology because it improves efficiencies. Modern, systemized risk management tools provide additional benefits, including better risk insight to help clients improve outcomes and automating tasks related to regulatory and compliance requirements—qualities that are also important to buyers.

Conclusion: Risk can no longer be treated as a back-office calculation

For forward-thinking RIA firms, it’s a front-office growth strategy. By upgrading to risk models that account for expected tail loss and tapping into the modern analytics and high-speed computing built into QuantumRisk, enterprise leaders can turn risk into a competitive advantage. The firms that act now will not only have more accurate information to help protect clients in volatile markets, they will also be better positioned to strengthen loyalty, accelerate growth, and build lasting enterprise value.

Amplify Technology, LLC (“Amplify”) is not a registered investment adviser. Its services are for informational purposes only and do not constitute investment advice or recommendation. Please consult a registered investment adviser before using Amplify and its services.

QuantumRisk™ is a proprietary tool developed by Amplify Technology, LLC. It is for informational and educational purposes only, designed to support financial professionals in evaluating portfolio risk. It is not investment advice and does not make recommendations to buy or sell any security. Outcomes will vary depending on advisor use and client circumstances.