Note: Descriptions are shown in the official language in which they were submitted.
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
FINANCIAL PORTFOLIO RISK MANAGEMENT
FIELD OF INVENTION
The present invention relates generally to computerized information systems
and more
particularly to computer implemented financial modeling systems.
BACKGROUND OF THE INVENTION
In today's economic environment, increasing number of individuals are
supplementing
their retirement plans with personal investment portfolios. Rather than
investing in mutual
funds, everyday greater numbers of individuals are opting for individually
managed portfolios.
Until recently, this option was only available to the very wealthy. However,
smaller investors
are becoming aware of the benefits of an individually managed stock portfolio.
These small investors are increasingly relying upon computer-based systems
that
organize their financial assets and liabilities and further provide them with
a summary of their
financial health. However, these systems tend to focus on the administrative
aspects of financial
planning without enabling the user to make reasoned choices about their
financial futures.
Furthermore, these systems are limited by their inability to dynamically
analyze the financial
goals. These limitations are counterproductive to the user's needs to develop
and manage an
integrated personal financial plan from an executive decision-making
perspective.
Many existing financial management systems allow users to electronically
organize their
financial assets and liabilities. These systems typically focus on presenting
the user with a
transactional summary of their financial health. Furthermore, these systems
typically rely on the
user to continually update their personal financial data. As a result, these
systems are merely
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
data-driven calculators that are incapable of providing the user with
meaningful financial advice
tailored to their financial intentions and expectations.
Another problem with many existing financial management systems is that the
user is
typically limited to managing the transactional details of their financial
data. In these systems
the user is shielded from the planning and deciding aspects of developing
their financial plan.
Accordingly, the user learns very little from the process and remains heavily
dependent on the
system to provide an accurate summary of their financial health. These
limitations further
exacerbate the lack of trust inherent within the relationship between the user
and the financial
management system.
Furthermore, many existing financial management systems merely project a
future value
of the user's financial portfolio without providing an indication of the
likelihood of achieving
that value. Thus, the user is left without any real sense of how to compare
one financial plan to
another. Consequently, these systems fail to foster a deeper understanding of
the risks and/or
rewards associated with reasoned financial planning.
Also, few investors have a real understanding of some basic investment
parameters such
as their risk tolerance, investment style market preferences. These personal
financial parameters
2o are what financial advisors would use to help an individual investor devise
an investment
strategy. Most of the current automated financial management tools are unable
to help a user
tailor a personal investment strategy. Furthermore, none of the current
financial modeling
tools available to the smaller investor can model an existing investment
portfolio and help the
user move toward an ideal portfolio that would better match the user's
investment style, risk
tolerance, etc. Also, none of the current portfolio modeling tools available
to the average investor
have the capability of recommending individual securities based on the user's
personal financial
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
parameters and preferences. Since most average investors are not able to
interpret the results of
these sophisticated algorithms, automated context sensitive coaching is
another essential
ingredient necessary to enable the user to assume an executive decision making
role in his
personal financial affairs.
No system currently exists that brings into a personal financial modeling
tool,
professional level industry accepted algorithms and modeling techniques to
forecast the future
performance of an investment model, and allow the user to analyze his or her
financial portfolio
using these techniques, and take advantage of automated and live coaching
along the way.
SUMMARY OF THE INVENTION
In general terms, the present invention relates to a financial management
system for
modeling the risk associated with the investment portfolio of a user. The
system operates in a
collaborative computing environment between the user and a financial advisor
and comprises a
service level subsystem and an advice generating subsystem. The service level
subsystem allows
2o the user to negotiate a service level agreement that defines the user's
desired level of support and
limits access to user provided information. The advice generating subsystem is
coupled to the
service level subsystem and includes one or more advice engines that
dynamically analyze the
financial needs of the user in accordance with the user's service level
agreement. Furthermore,
the advice engine provides customized financial advice tailored to the user's
life intentions.
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
In a preferred embodiment of the present invention, after the user and the
financial
modeling system have negotiated a service level suitable for the user and
profitable for the
financial institution, the user has access to a variety of financial tools
including the risk modeling
tool, based on the service level agreement.
In one embodiment of the present invention, the system includes a portfolio
modeling
system, wherein information from various sources including external sources,
and from the user
inputs are combined and modeled into the user's current and historical
financial portfolio.
Furthermore, a financial portfolio risk management system creates a user
personal investment
i0 profile based on a series of interactive exercises wherein the user is
guided through a various
scenarios generated by the system and the user responses are evaluated in
terms of user risk
tolerance, user investment style and user's bull/bear attitude toward the
market.
Once the user's personal investment parameters have been determined, the
system may
15 generate an ideal portfolio based on the user's personal investment
profile. Securities may be
filtered through various filters reflecting the user's market attitude,
investment style and risk
tolerance and securities may be suggested to better mold the user's portfolio
to his investment
profile. The effect of swapping each security in and out of the user' s
portfolio is reflected in the
model.
Also, the user's present portfolio may be compared to various market indices
in terms of
risk and return, and the result is graphed on a risk/reward map. The system
compares the user's
portfolio Value At Risk to that of some user selected benchmark indexes and/or
securities. The
user portfolio's volatility or Beta value can be compared to that of chosen
benchmark Beta
values.
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
In an alternative other embodiment of the present invention, by various
algorithms, the
system may project the user's portfolio value into the future and predict the
possibility of the
user achieving his investment target, as well as the probabilities of doing
better and worse than
the user minimum goal.
The present invention allows the user to access an automated rule-based
coaching system
directing the user through all transactions within the system, focusing his
attention to possible
financial problems and suggesting possible general solutions. Furthermore,
having received
to automated coaching, the user may further have access to a live advisor in
order to receive more
specific financial advice. The access to the automated coaching and the live
advisor may be
controlled in part by a service level agreement.
The present invention's financial risk modeling system is a dynamic,
interactive and
15 intelligent risk modeling tool that incorporates a user profiles as a
parameter of the financial risk
model. Thus the system can model the user's existing and historical financial
portfolio, and
further make appropriate user specific recommendation to help the user achieve
his financial
goals, by filtering and presenting to the user only securities that conform to
the user's personal
investment parameters. The present invention helps investors to objectively
quantify the risk and
2o reward in their personal portfolios. It supports investors in making
optimal picks to meet their
investment goals and avoid unaffordable losses. These and other advantages of
the present
invention will be apparent upon a study of the following descriptions and
drawings.
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
BRIEF DESCRIPTION OF THE DRAWINGS
The foregoing and other objects, aspects and advantages are better understood
form the
following detailed description of a preferred embodiment of the invention with
reference to the
drawings, in which:
Figure 1 illustrates a representative system architecture in accordance with a
preferred
embodiment;
Figure 2 is a block diagram of a financial management system;
Figure 3 is a block diagram of a representative hardware environment in
accordance with a
preferred embodiment;
Figure 4 is a block diagram of a financial management system;
Figure 5 is an illustration of a investment portfolio generator web page
interface;
Figure 6 is a flow diagram of an operation of the Investment Portfolio
generator in accordance
with a preferred embodiment;
Figure 7 is a flow diagram of how to set risk tolerance;
Figure 8 is a flow diagram of how to set investment style;
Figure 9 is a flow diagram of how to set Bull/Bear attitude operation in
greater detail;
Figure 10 is a flow diagram of how to model an existing portfolio;
Figure 11 is a flow diagram of how to build a computer generated portfolio;
Figure 12 is a flow diagram of how to rebalance a portfolio;
Figure 13 is a flow diagram of portfolio analysis steps;
Figure 14 is an illustration of a risk target graph web page interface;
Figure 15 is an illustration of a risk exposure up to the present graph web
page interface;
Figure 16 is an illustration of a portfolio future performance projection
graph web page interface;
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
PAGE INTENTIONALLY LEFT BLANK
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
DETAILED DESCRIPTION OF THE PREFERRED EMBODIMENTS
Figure 1 is an illustration of one embodiment of a financial management
information
system for providing personalized financial advice in a collaborative
computing environment
between a user and a dedicated financial advisor. Refernng to Figure 1,
financial management
system 100 comprises a financial advisor system 102 connected through a wide
area network
104 to the live advisor terminal 106 a user terminal 110. The financial
advisor system 102
further includes a risk modeling system 107 that performs various risk
modeling operations on
the user investment portfolio. Preferably, the wide area network 104 is a
global network such as
to the Internet. The Internet is based on the TCP/IP communication protocol
first developed by the
Department Of Defense in the 1960s. However, the present invention is not
limited to the
Internet and the TCP/IP protocol. The present invention can be implemented
using any other
protocols and any other networking system, including wireless networks, the
Network File
Service (NFS) protocol used by Sun Microsystems or a Novel network based on
the UDP/IPX
15 protocol.
Preferably, the user may access the system through any type of a wide area
network using
a any user terminal 110. A typical user computer terminal would be described
in more detail in
figure 3.
The user (e.g. individuals or company representative seeking financial advice)
may
access the system using a user terminal 110 (e.g. personal computer). A
typical user computer
terminal would be described in more detail in figure 3. The user terminal 110
is equipped with a
proper interface to receive live streaming video or still pictures from the
advisor video camera
108-B sent over the wide area network 104 to the user 110. Preferably, the
user terminal 110 is
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
further equipped with a video camera 108-A and software to transmit live
streaming video from
the user, across the network 104 to the live advisor at the advisor terminal
106.
Access to the live financial advisor 106 and all other services provided by
the Financial
management system is controlled and channeled through the Financial Advisor
system 102. The
user can access the financial advisor system 102 through the network 104 or by
telephone 109-A.
A user telephone call is channeled through a call center discussed further in
Figure 2 to the
Financial Advisor System and to the live advisor 106.
l0 Preferably, the user may communicate with the financial advisor system 102
through any
number of devices such as a handheld wireless personal organizer, pagers,
cellular telephones,
land telephones and regular desktop computers. All of the above equipment can
act as a user
terminal 110.
15 The live advisor terminal 106 is preferably equipped with the video camera
108-B for
transmitting live streaming video. The live advisor 106 may further
communicate with the user
via a telephone 109-B.
Figure 2 is a block diagram of an implementation of the financial advisor
system 102.
20 The user may access the system through the wide area network 104 and
through a firewall server
112. In a preferable implementation of the present invention, the wide area
network is the
Internet, intranet, etc. A Web server 114 provides the user with a
personalized website providing
an interactive interface between the user, the financial advisor and financial
management system
100. The financial advisor system 102 further includes of a mail server 116,
an application
25 server 126, a call center 117 and a data server 128, all interconnected
through a local area
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
network 106. The local area network (LAIC 113 may be any wide area intranet
system or the
Internet.
Security is important in any financial system. The firewall server 112
controls the access
to the financial advisor system. The purpose and functionality of a firewall
server is to prevent
access to the system by unauthorized users and it would be appreciated by one
skilled in the arts.
Firewall servers are available through a variety of vendors and have become a
standard feature of
any secure system used as the primary defense against intruders and hackers.
l0 The web server 114 provides a personalized interactive web page environment
for the
user to operate in once he accesses the system. The web page is acting as the
web interface
between the financial system Web pages may be created using the Hyper Text
Markup
Language (HTML), scripting languages such as Java ScriptTM or PearlTM as well
as JavaTM
applets. Creation of customized web page using any of the above programming
languages is
15 well within the scope of one skilled in the arts. The personalized web page
provides an
environment and an interface for the user to interact with the financial
advisor system 102. As
an example, in one embodiment of the present invention, by selecting an
appropriate icon from
the interactive personalized website, the user is able to learn, plan, decide,
transact and monitor
his financial model. The mail server 116 handles electronic mail communication
between the
20 user and the financial advisor system 102. The Mail server 116 may operate
using any standard
protocol such as Simple Mail Transfer Protocol (SMTP) and it is within the
scope of the
knowledge of one skilled in the art.
The application server 126 is where the various modules of the financial
advising system
25 reside. The modules include the various coaching engines, the LifePath and
the portfolio
modeling sub-systems. The applications may be implemented in any programming
language,
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
including the object oriented programming languages such as C++ or JavaTM and
be based on
any platform such as UNIXTM, Apple OS TM or WindowsTM and NTTM.
Alternatively, the user may also interact with financial advisor system 102
using a
telephone 124. The user's call is channeled through the call center system
117. The call center
117 includes an Automatic Call Distributor (ACD) server 122, an Interactive
Voice Response
Server (NR) 124, a Computer Telephony Integration (CTI) server 118 and a
Relationship
Manager (RM) workstation 125, all interconnected through the Local Area
Network or intranet
127. The local area network 113 may also be used in interconnecting the
various servers of call
l0 center. When the user calls into the financial advising system 102 using a
remote telephone 124,
the IVR sever 124 receives the user's telephone call. The IVR system greets
callers, prompting
them for identification, and providing some information automatically. The
Automatic Call
Distributor (ACD) server 122 distributes the call using the Internet Protocol
(IP) over the
network, to the appropriate live coach. The Computer Telephony integration
server (CTI) 118
15 acts as the link between the live advisor's telephone call and the
workstation based applications
and allows them to automatically work together. As an example, when the IVR
server 120
obtains some information about the calling user, this information is delivered
to the live
advisor's workstation 106, so the advisor does not have to request the same
information again.
Once the telephone call is properly routed to the live advisor, the user can
user other means of
20 communication such as electronic mail or white board TM simultaneously
while he is interacting
with the live advisor.
The Data server 128 stores user input data and supplies the application Server
126. The
data server 128 includes outside database sources from which the financial
advising system 102
25 can draw information such as actuarial data such as historical price data
on securities from
sources such as Reuters, user financial information such as banking and
portfolio information in
11
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
other financial institution, and market information such as the days closing
numbers for various
market indices as well as individual stock securities pricing information.
Formatted in the Open
File Exchange (OFX) format, now the accepted Internet standard used by
programs such as
QuickenTM and MS Money TM the data server through the firewall can easily
exchange
information with the outside world and specifically the user. Furthermore, the
coaching engine
rules for various coaching engine may reside on the application server 126.
It should be noted that various computing platforms could be used to access
the financial
management system of the present invention. For example, a networked personal
computer
to environment, a client-server system, a mainframe terminal environment, WEB
TV terminal
environment, dumb terminal environments can be used to access the financial
management
system of present invention. Depending upon the user's needs, a client-server
system may be the
most preferable computing system for implementing the financial system of the
present
invention. Furthermore, the representation of each server such as an
application server or a data
15 server is a logical representation. The actual physical systems may be
distributed over many
servers, or be included on a single machine.
Figure 3 is a computer system architecture that can be used in implementing
the present
invention. This computer system architecture can be used to implement a user
workstation, or
20 any of the servers called for in figure 2. The present invention may be
practiced on any of the
personal computer platforms available in the market such as an IBMTM
compatible personal
computer, an Apple MacintoshTM computer or LTNIXTM based workstation. The
operating system
environment necessary to practice the present invention can be based on
WindowsTM, NTTM,
~~TM~ Apple Operating SystemTM, or free operating system software such as
LinuxTM and
25 ApacheTM. Furthermore, the computer system can support a number of
processes. As
appreciated by one skilled in the art, the processes may be written in any of
the available
12
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
programming languages including the newer object oriented programming
languages such as
Java TM or C++.
The computer system architecture of figure 3 comprises of a central processing
unit 130,
such as a microprocessor, a read only memory (ROM) 136, a random access memory
(ROM)
134, an input and output adapter 138, a storage device 140, and interface 142
connecting a
plurality of input and output device such as a keyboard 144, a mouse 146, a
speaker 148, a
microphone 150, a video camera 152 and a display 158, and a system bus
interconnecting all the
components together. The computer may also include such devices as a touch
screen (not
to shown) connected to the bus 132 and communication adapter 154 such as a
dial up modem, a
Digital Subscriber Line (DSL) modem or a cable modem, for connecting the
workstation to a
communication network 104 (e.g., the Internet). The storage device 140 can be
any number of
devices including but not limited to hard disk drive, a floppy drive, CD-ROM,
DVD, a tape
device, or the newer removable storage devices such as a JazzTM drive or ZIPTM
drive.
Figure 4 represents a block diagram of a financial Modeling System 102 of the
present
invention. A user would connect to the Financial Advisor system 102 using the
wide area
network 104. Once connected, the user has to input his login information and
be authenticated
by the firewall server. The user at a user terminal 110 enters the Financial
Advisor system 102 at
2o the service level subsystem 160. The service level agreement provides the
level of services the
user is entitled to. Once the user has negotiated a service level agreement
161, he is prompted to
select the model to be used in operation 162. In one embodiment of the present
invention, the
level of service and support selected in the service level agreement 160 would
control the user's
access to different modeling tools.
13
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
In a preferred embodiment of the present invention the Lifepath model may be
the hub of
the financial institution's relationship. The LifePath model provides data to
all coaching engine
allowing customized coaching output to be dispensed to the user based on his
unique financial
situation. The Lifepath model combines all the pertinent financial information
about a user in
one coherent and comprehensive picture and models the user's life intentions
into an aggregated
cash flow system over a user selected period of time. Using the terminal 110
the user inputs his
life intentions in terms of projected income and expenses. The Lifepath model
164 maintains an
interactive dialog between the user and financial management system 100. The
Lifepath model
integrates the financial information available about the user in accordance
with the user's service
to level agreement 160 to create an aggregate forecast of cash flow over the
user's lifetime. The
financial information available about the user includes the user's life
intentions data 166 and the
user's external financial data 168. In a preferred embodiment of the present
invention, the user's
external financial data can include current checking account information from
the user's bank or
data related the user's 401K plan. By incorporating external data 168 into the
Lifepath model
15 164, the system is capable of dynamically analyzing the financial needs of
the user and providing'
the user with an understanding of their financial health at any point with
minimal input form the
user. As discussed above, personalized service level agreement 160 can
optionally allow the
user to limit the system's and/or advisor's access to the user's external
financial data 168.
20 Additionally, life path model 164 also integrates external market data 170
into the
aggregated forecast of the user's cash flow. In one embodiment of the present
invention,
external market data 170 includes information such as current mortgage
interest rates or market
inflation rates. Access to both internal and external databases is controlled
by the user's service
level agreement.
14
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
The LifePath modeling tool 164 is further discussed in a related U.S.
application named
the A Financial Planning and Counseling System Projecting User Cash Flow, by
the same
inventors as the present invention, attorney docket number AND1P758, filed on
the same day as
the present application and incorporated herein by reference. Furthermore, the
communication
system described in figure 2 is further described in the related application
titled Communication
Interface For a Financial Modeling and Counseling System, attorney docket
number AND1P757,
by the same inventors as the present invention, filed on the same day as the
present invention,
and herein incorporated by reference. The automated coaching and live advising
systems are
further described in the related patents titled Financial Modeling and
Counseling System,
to attorney docket number AND1P755 and Automated Coaching for a Financial
Modeling and
Counseling System, attorney docket number AND 1 P760, and A User Interface For
a Financial
Modeling System, attorney docket number AND1P759, all by the same inventors as
the present
invention, and all filed on the same day as the present application, and all
of which are herein
incorporated by reference.
Alternatively, the user may by pass the LifePath model and start with the
portfolio
modeling tool 182. The availability of the portfolio modeling tool is based on
the user's service
level agreement 161. The user would supply his financial portfolio information
to the financial
advising system 102, either directly using the user terminal 110 or indirectly
through the wide
area network 104, by accessing a multiplicity of databases 166, 168 and 170
and accessing
information such as his securities portfolio at a particular brokerage firm.
The financial portfolio
modeling tool 182, is an interactive tool that has access to the all the
information available to the
Lifepath model 162, such as the user's life intentions data 166, the user's
external financial data
168, as well as external market data 170. User insight data 167 and aggregated
data from the
Lifepath model 165 is also available to the portfolio modeling tool. As a
result the user has little
to input and may start using the portfolio model 182 very quickly without the
need to do a lot of
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
tedious data input. The financial portfolio modeling also allows the user to
access a computer
coach and/or a live advisor based in part on the service level agreement.
An alternative embodiment allows the user to go through the LifePath model 164
and set
his long term financial goals and then using the portfolio modeling tool 182
the user would
adjust his investment portfolio to better achieve his long term financial
goals.
Advice generating subsystem 172 comprises one or more advice or coaching
engines
174. Coaching engine 174 dynamically analyzes the financial needs of the user
in accordance
l0 with the user's service level agreement. Furthermore, the coaching engine
174 is configured to
operate with rules repository 176. Rules repository 176 is a collection of
rules-based business
logic that produces clear automated advice. Rules repository 176 generates its
advice using
LifePath data 165 and user insight data 167. Alternatively the investment
portfolio data from the
portfolio modeling tool 182 triggers the coaching engines advise. In one
embodiment of the
15 invention, user insight data 167 includes transaction history, product or
purchase history, as well
as demographic information about the user.
In addition to providing sound coaching to the user, advice generating
subsystem 172
also recommends product solutions to the user. As an example, in one
embodiment of the
20 present invention, the coaching engine 174 can recommend that the user
include deposit products
and loan products in their financial plan. For example, the coaching engine
174 can recommend
that the user acquire a certain mortgage or bridge financing. Similarly, the
coaching engine 174
can also direct the user to the need for financial products such as, home
improvement, line of
credit, or credit card products. Coaching engine 174 can also have access to
product information
25 from various financial institutions (not shown). Accordingly, the user can
request additional
information about the various products recommended by the system.
16
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
The user can access their financial plan or life path model using user
terminal 110. User
terminal 110 is part of collaborative computing environment 178 and is in data
communication
with virtual coach 180 and the advisor terminal 106 through communications
network 104. In
one embodiment of the present invention, communication network 104 is the
Internet.
The advice and product solutions generated by the advice generating subsystem
172 are
presented to the user through virtual coach 180. Virtual coach 180 presents
the product
recommendation with accompanying rationale. The user may or may not wish to
contact the
dedicated financial advisor for additional advice or information. Because the
system generates
reasoned financial coaching in accordance with the user's financial needs and
intentions, the
financial advisor is able to operate more productively. Furthermore, the user
can test different
scenarios by altering the data captured by life path model 164. Each scenario
can then be
analyzed by coaching engine 174. The virtual coach 180 is further described in
the related U.S.
application named Automated Coaching System, attorney docket number AND1P760,
by the
same inventors, filed on the same day as the present application and
incorporated herein by
reference In addition to virtual coach 180, the user can optionally interact
with a dedicated
financial advisor 106 through communications network 104.
2o In one embodiment of the present invention, financial advisor 106 is
located in a call
center 118 on a relationship manager's workstation 125. Financial advisor 106
can interact with
user 110 using various multimedia interaction tools, for example, still-shot
images or video
streaming. Accordingly, the user is able to buttress the coaching received
from virtual coach 180
with advice from a dedicated financial advisor operating at terminal 106. In
many situations, the
live advisor's input may be necessary, since he brings a level of expertise
and experience no
automated coaching system may match. However, since the automated coaching has
framed the
17
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
problem for the user and the live advisor, both can immediately start
analyzing alternative
solutions in a focused and more cost efficient fashion.
Depending on the level of service the user has negotiated with the service
level
agreement 161, he may have a multiplicity of modeling tools available in the
financial
management system. In alternative embodiments of the present invention,
modeling tools for
analyzing various financial instruments such as bonds, reverse mortgages,
option contracts and a
like may be available to the user.
to Figure 5 is an exemplary graphical user interface 196 that embodies the
various concepts
and methods set forth for financial portfolio modeling. As shown, the
graphical user interface
196 includes a plurality of fundamental selection icons 198 including a my
page icon 200 for
displaying a graphical user interface specifically tailored for a particular
user, a save icon 202 for
saving any changes made to the graphical user interface 196, an export icon
208 for exporting
15 data displayed by the graphical user interface 196, a print icon 210 for
printing various fields of
the graphical user interface 196, a help icon 212 for obtaining help
information, and an exit icon
214 for exiting the graphical user interface 196.
My page icon 200 displays a web page that can be customized to each user's
need,
2o simplifying the use of the portfolio model 182. In one embodiment of the
present invention, the
portfolio modeling system uses the Open File Exchange (OFX) protocol which has
become the
standard protocol for the exchange of financial information over a wide area
network, and
particularly the Internet. Thus exported data from the portfolio modeling
system into other
financial programs is formatted to be easily usable by these programs.
18
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
Further displayed on the graphical user interface 196 is a plurality of mode
icons 216 for
initiating various modes of operation. The mode icons 216 include a transact
icon 218 for
initiating transactions involving the purchasing and selling of investments
utilizing a network, a
monitor icon 220 for monitoring the performance of the investments, a model
icon 222 for
generating an investment model based on criteria entered by the user, an
explore icon 224 for
retrieving information on the investments, and a track icon 226 for tracking
the investments
utilizing the network. In the preferred embodiment of the present invention,
the Wide Area
Network 104 is the Internet and the portfolio modeling system has access to
outside databases
such as Reuters and Bloomberg for historical and current securities pricing or
market indexes.
to
With continuing reference to Figure 5, a communication medium 228 may be
employed
to converse with other users, namely financial advisers, etc. Such
communication medium 228
includes a window 230, and a plurality of communications icons 232 that enable
various types of
communication between the user and the live coach or advisor. Such
communications icons 232
15 include an e-mail icon, a chat icon, a voice icon, a talk icon, a clips
icon, and a video icon. The
mail server 116 and call center 118 allow the user to contact the advisor by
email or telephone
call. The mail server further supports live chat and voice over the network as
well as a
collaborative medium such as a White BoardTM. Depending on the bandwidth
available to the
user, he may receive still pictures or live streaming video of the advisor, or
he may see an
20 animation.
The incorporation of the various communication technologies and programs
within the
context of a financial advising system is further described in a related
application titled
Communication Interface for a Financial Modeling and Counseling System,
attorney docket
25 number AND1P757, by the same inventors as the present application, filed on
the same day, and
incorporated herein by reference. Also, the graphical user interface of figure
5 is further
19
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
described in the U.S. related application by the same inventors, titled A User
Interface for a
Financial Modeling System, attorney docket number AND1P759, both filed on the
same day as
the present invention and both herein incorporated by reference.
A filtering field 234 is also shown in Figure 5. Such filtering field 234
includes a
plurality of companies and associated risk levels and industries which are
displayed in
accordance with the user's appropriate tolerance to risk and investment style.
A risk/reward map
236 is also shown displaying the probability of the user reaching its
financial goals. Also shown
is a coaching window 238 for displaying coaching strings 240 based on a rule-
based automated
coaching engine. Such window 238 may include a field adjustment bar 242 in
order to facilitate
viewing of the coaching strings 240.
Further features associated with the graphical user interface for the
portfolio modeling
182 include an information window 244 which illustrates various charts
pertaining to sector
diversification and other investment parameters. A portfolio model window 246
may also be
displayed for portfolio modeling purposes. It should be noted that the various
services provided
by the present invention might be initiated by selecting corresponding service
icons 248. The
optimize icon 247 optimizes a securities list based on the newly specified
criteria. The criteria
icon 249 enables the user to introduce additional criteria for selecting a
particular security. The
trade list 251 displays the system recommended securities that should be sold
based on the user
criteria and his personal financial parameters. The filter icon 253 generates
a filtered list of
securities displayed in the filtered list window 234. Sort icon 261 sorts the
list of securities
based on a user selected criteria such as alphabetical order. The coaching
icon 259 generates
context sensitive coaching related to the user's financial portfolio. The undo
icon 257 undoes a
specific swap of securities. The submit icon 255 submits and the user changes
to his portfolio
during the current session.
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
Further, a profile may be viewed and adjusted using a plurality of profile
icons 250. This
ease of use helps the user to feel comfortable with the system and trusting of
it, allowing him to
take full advantage of the all the integrated features of the system.
The user can set a target goal for his investment portfolio as well as his
preferences by
selecting the target and preference icon 252. He may do an analysis on his
past or present
portfolio by selecting the portfolio analysis icon 254. He may trigger
specific coaching on
specific a security or group of securities or even on whole industry sectors,
as well as request
1o more detail information by selecting the stock analyst icon 256. He may
further model and
analyze the effect of inclusion or exclusion of particular securities on his
portfolio by swapping
stocks in and out of the portfolio 258. When selecting a particular icon
corresponding to the
various tools, a corresponding help text string appears in the help screen
260, directing the user
on how to use the particular tool.
Figure 6 illustrates an investment portfolio management method utilizing a
coaching
engine in a network based financial framework. First, in operation 261, a
plurality of parameters
is set for a subject utilizing a network. The parameters include personal
investment parameters
262, personal financial parameters 264, and/or asset mix parameters 266. Such
parameters may
2o include a minimum retirement, target floor, investment rate, tax
implications, etc. In operation,
the parameters may be selected manually by the subject using a desired graphic
user interface, or
by a third party.
Next, the network is utilized to provide the subject coaching from an
investment coaching engine
in operations 268, where such coaching relates to the setting of the
parameters. The coaching
may be provided by utilizing a look-up table which is capable of generating
various
21
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
combinations of advice based on the settings. In the alternative, the advice
may be generated
using any other type of artificial intelligence system.
At least one financial model for a portfolio of the subject is subsequently
generated in operation
270 based on the setting of the parameters. This may be generated using a
system similar to that
which generates the coaching, or any other desired means. The network is again
used to provide
coaching from the investment coach engine to the subject with the coaching
relating to the
generated financial model.
As shown in Figure 6, the personal investment parameters include a risk
tolerance parameter
272. Further, the coaching by the coaching engine 274 may provide a textual
risk tolerance
profile for the subject based upon an interpretation of current risk tolerance
parameters of the
subject as textual analysis.
Further, the personal investment parameters may include an investment style
parameter
276. In such embodiment, the coaching by the coaching engine 278 provides a
textual
investment style profile for the subject based upon an interpretation of
current investing style
parameters of the subject as textual analysis.
Furthermore, in yet another embodiment of the present invention, the personal
investment
parameters include a bull/bear attitude parameter 270. In the present
embodiment, coaching by
the related coaching engine 272 provides a textual description of an implied
future of financial
markets and graphs showing forecast curves of financial markets based upon the
building of
financial market forecasts which are, in turn, based upon evaluations from
financial experts.
22
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
In one embodiment, the coaching by the coaching engine 274 relating to the
setting of the
personal financial parameters in operation 262 provides an alert if the
investment parameters of
the subject conflict with Lifepath cash flows or personal parameters based on
a consistency
check of the investment parameters with data obtained from a Lifepath model
and personal
investment parameters.
With continuing reference to Figure 6, the coaching by the coaching engine 288
relating
to the setting of the asset mix parameters in operation 290 provides a
rationalization of the asset
mix based on personal and financial parameters of the subject and at least one
computer
1o generated asset mix. No penny stocks would be included if the subject is
conservative, only
treasury bills. A pie chart may also be included that represents a portfolio
showing the subject's
assets.
In still another embodiment, the financial model comprises a model of an
existing
15 investment portfolio of the subject. Note operation 292. The coaching by
the coaching engine
294 provides an analysis of market-related growth by security and sector,
trend analysis, fee and
service analysis, and/or dividend and interest impact based upon transaction
history and current
market values of the existing investment portfolio.
The coaching by the coaching engine 294 may also provide an analysis of
growth, risk and value
2o of the existing investment portfolio based on market data and expert
analyst opinion.
Still yet, the coaching by the coaching engine 294 may provide an evaluation
of the
existing investment portfolio relative to the personal and financial
parameters of the subject
based on a comparison of growth and volatility projected forecasts to the
personal and financial
25 parameters of the subject. It should be noted that similar capabilities may
be provided using a
model based on a computer generated portfolio in operation 296.
23
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
In operation 298, the financial model may include a model of an investment
portfolio of
the subject generated by the subject with the input of a private banker.
Coaching by the coaching
engine 300 provides an analysis of growth, risk and value of each security in
the investment
portfolio based on a concatenated, user-friendly English format of market data
and expert analyst
opinion obtained utilizing the network 104.
Further, the coaching by the coaching engine 300 may provide an evaluation of
the
contributions of securities in the investment portfolio relative to the
personal and financial
1o parameters of the subject based on a comparison of the personal and
financial parameters of the
subject to an analysis of risk compliance, growth, and volatility.
The first wave of customers of online discount brokerage customers have been
characterized by sophisticated investment knowledge and confidence in acting
as integrators of
15 their own financial lives. They have established their own balance between
risk and reward.
Most of today's typical investors, typically know relatively little about the
technicalities of
investing.
In one embodiment of the present invention, a financial risk management system
may
2o include traditional fundamental/technical data and analyst interpretation.
Much of this is
meaningless to the average investor however. The present invention's approach
meets their
information and learning requirements in these ways. First it develops
detailed profiles of the
user's investment personality and customizes all information such as coaching
to the user profile.
Second the system uses coaching engines to translate fundamental and technical
data into natural
25 language textual coaching string outputs, customized to the user.
Furthermore, the financial
modeling and counseling system alerts the user to investment activities which
are incompliant
24
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
with his personal investment parameters such as his risk tolerance, investment
style and so on ...
The financial modeling and counseling system further provides automated
coaching throughout
the investment process.
Risk tolerance, investment style and financial outlook are established through
a series of
interactive multimedia- based scenarios which unfold online. These exercises
provide immediate
coaching feedback to the user. The results are stored as a multidimensional
profile which is used
by modeling and coaching activities throughout the portfolio management
process.
Figure 7 is a flow diagram illustrating the set risk tolerance operation 232
in greater
detail. The user starts 302 this process by selecting the profile icon 250.
The user is prompted
for the security type to be used for risk profiling 304. Next, a negative
financial scenario is
presented to the user and he is asked if he wants to bail out once confronted
with this negative
scenario 306. The negative scenarios presented to the user are generated by
the coaching engine
274 and may include scenarios such as negative news related to a particular
security and the
company's future growth or performance and profitability. Faced with this
situation, the user
may decide to hold on to the particular security or sell and bail out. In one
embodiment of the
present invention the representations may include both textual and graphical
representation, and
may further include headline news indirectly related to the particular
company. Alternatively,
the scenario generated may encompass as whole sector or industry such as the
interest sensitive
construction industry. Both indirect economic news such as a forecast of
future interest rate and
direct economic news such as declining housing starts or sales of new homes
are presented to the
user and his reaction to the negative news is indicative of his personal risk
tolerance. If the user
selects to bail out 308 based on the negative financial scenario, his risk
tolerance profile is
adjusted accordingly 310. If the user refuses to bail out, he is confronted
with an iteratively
more negative market scenarios 306 scenario and again he has the option to
again bail out 308.
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
Depending on when the user selects to bail out 308, the system adjusts the
user risk profile for
that security type 310. The process is repeated for other types of investment
such as Retirement,
Tax deferred environment.
The user reaches the end 312 of this process after the system has determined
his risk
tolerance for each investment type. Alternatively, the user's risk tolerance
level can be set
manually by a third person such as the live advisor or even possibly by the
user himself. The
average unsophisticated user does not know about his risk tolerance level.
to The present invention provides risk management and reporting capabilities
for personal
investment portfolios of stocks and bonds. The present invention allows
customers to be able to
quantify the risk associated with their equity holdings for the first time.
Currently risk
management for personal portfolios is based on judgment and gut feel. The
brokerage industry
is currently facing a number of challenges and opportunities related to this.
Too many optimistic
15 self directed investors are assuming levels of risk they are not aware of
and cannot afford. As
well, regulators are concerned about the lack of controls in the trading
environment potentially
resulting in widespread losses and liability litigation.
Currently, risk management is a vague area which advisors and clients
typically address
2o using judgment and intuition. Advisors and brokerage firms need to quantify
risk to mitigate
legal liability. In addition, investors want to quantify the impact of
individual picks on their
portfolio risk/reward. Further, regulators will be supportive of processes
that help investors to
become more knowledgeable about risk and avoid unaffordable losses. Finally,
the brokerage
industry needs to outsource risk management services to avoid any additional
technology
25 problems and to ensure third party objectivity.
26
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
Many investors build their own spreadsheets to understand their portfolio
performance. The
present invention provides new tools to benchmark portfolio performance and
set a new industry
standard for reporting and analysis.
Figure 8 illustrates a flow diagram for determining an investment style in a
network-
based financial framework. The present technique is intended to not just ask
questions, but
provide scenarios. It sets up a portfolio of stocks that an investor can trade
or not trade on these
fictitious stocks, and provides examples of how the stock market can move. The
present method
develops a profile and helps target information effectively for the particular
person. Coaching is
1o strategically designed to keep the risk minimal by avoiding telling what
someone should do.
Scenarios will also identify areas of weakness in one's knowledge.
In one embodiment, the interactive input exercise may include top down or
bottom up
test scenarios 314, trading frequency test scenarios 316, needs for
information and research test
scenarios 318, level of expertise test scenarios 320, and/or strategic or
pragmatic test scenarios
382. For example, a bottom up investor would start with a vision of the
economy and decide
what to invest in, and then they would look at one stock at a time and make a
decision. Trading
frequency is used by the system to project the user's portfolio performance in
the future by
taking into account trading cost. Level of expertise scenarios may be used to
customize coaching
2o strings and the level of explanation put forth by the automated coaching.
In use, an investment profile of the subject is generated based on the at
least one
interactive input exercise in operation 324. Coaching is also provided for the
subject based on
the generated investment profile. A display may be generated for the subject
based on the
generated investment profile. Note operation 326. In one embodiment of the
present invention,
27
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
the user may reject his investment style parameter as presented to him by the
automated
coaching and go through the process 276 to reset his investment style
parameter.
Figure 9 illustrates a flow diagram for the "set Bull/Bear attitude" in
operation 280. The
instant aspect of the present invention is able to come to a conclusion about
a person. For
example, it may determine how confident a person is about the future. Online
polling is one
technique that allows the present invention to become the basis of a
customer's long-term
1o parameters. It achieves a systematic attempt to capture one's perspective
on the economy as a
whole. First, an expert is selected utilizing a network in operation 328.
Next, an opinion from the expert is rendered utilizing the network and
witnessed in
operation 330. At least one evaluation of the expert's opinion is then
received from a subject
15 utilizing the network. Note operation 332. As an option, the step of
obtaining the evaluation
may be accomplished by displaying to the subject a plurality of choices for
expressing the
subject's agreement with the opinion of the expert, receiving a selection of
one of the choices
from the subject utilizing the network, and storing the selection. In one
aspect of the present
invention, the plurality of choices displayed to the user may include the
following: strongly agree
2o with the opinion, agree with the opinion, neutral to the opinion, disagree
with the opinion, and/or
strongly disagree with the opinion.
In operation 334, the subject may be permitted to select at least one other
expert utilizing
the network after which operations 328-332 of the present invention may be
repeated. The
25 evaluations) may then be aggregated from one or more subjects, as indicated
in operation 336.
28
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
Thereafter, in operation 338, at least one financial model is built based on
the aggregated
evaluation from the subject. As an option, the financial model may be selected
from a model
based on the future of a financial index, a model based on an interest rate
curve, and a model
based on a gross domestic product (GDP). Further, the financial model is
displayed in operation
340 utilizing the network. In one aspect of the present invention, the subject
may be coached
utilizing the network. See operation 342. Such coaching may be based on the
financial model.
Once personal investment parameters have been identified, the user is prompted
to input
some basic personal financial parameters 264. Unlike the Personal Investment
Parameters,
1o which are largely qualitative, the Personal Financial Parameters are
quantitative. They may
include, initial and target values of the portfolio, the user's investment
time frame, and whether
the portfolio is a tax exempt IRA, 401K or Canadian RRSP
One important datum is the "floor." In a retirement portfolio this would be
the bare
15 minimum acceptable lifestyle the customer would be prepared to accept. The
risk model used
for analysis projects the portfolio value forward compounded at its current
rate of growth.
Surrounding the forecast line there are risk bands showing best and worst case
scenarios given
the aggregated volatility of all contained securities. The bands are
preferably defined for
example, by Bell curve theory and represent a sigma value related to the
confidence level the
2o customer requires in the forecast. The greater the confidence required, the
wider the bands. If
the "floor' value ends up within the bands, the customer is at risk of an
unacceptable retirement.
The customer can settle for less confidence in the portfolio projection. He
may also optimize a
portfolio that hits the target with lower risk using the automated coaching to
guide him. He may
fizrther accept a lower target at lower risk and rebalance his portfolio. He
may simply lower his
25 "floor" or decide to increase his contribution. Once the user's personal
investment parameters
29
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
and user's personal financial parameters have been established, the system
sets the asset mix
266.
The following data model shows the data sources and how the data is being used
within
the system.
i
a Sourc__es:
w_:w»=: -..
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
The present invention uses an interactive model where various data sources are
accessed
through a wide area network such as the Internet and the user does not have to
feed to the system
as much data manually. In an embodiment of the present invention, the risk
modeling system
may access external data sources supplying data for some of the risk/reward
calculations in risk
management system such as historical security pricing data from a source like
Reuters, historical
transaction data from the customer's brokerage, manual input by the customer,
and some other
file type, e.g. QuickenTM and MS MoneyTM. Reuters data includes time series
updated to Close
from the previous day,
adjusted for stock splits, comma delimited flat files, or other format of
choice relating to up to
l0 500 million stocks, bonds, mutual funds, derivatives ,etc. These files are
formatted in OFX, the
Open File Exchange format, now the accepted Internet standard which is the
same format used
by QuickenTM, MS MoneyTM, etc.
Figure 10 illustrates a flow diagram for modeling an existing financial
portfolio 292.
15 First, the performance of at least one investment of a subject is
determined utilizing a network.
As shown, the performance of the investment includes obtaining a transaction
history of the
investment in operation 344, obtaining a current market value for the
investment in operation
346, and analyzing the performance of the investment based on the transaction
history and the
current market value of the investment. Note operation 348.
20 Next, financial information is obtained relating to the investment of the
subject. The step
of obtaining the financial information relating to the investment may include
obtaining historical
data on the investment in operation 350, and obtaining research relating to
the historical data of
the investment in operation 352.
25 With continuing reference to Figure 10, the aggregated growth and
volatility of the
investment is calculated in operation 354. Such calculation may be performed
based on bell
31
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
curves, and other statistical techniques. Best case and worst case scenarios
may also be
produced.
A projection to a target date is subsequently built for the investment. Note
operation 356.
This is done based on the determined performance of the investment, the
financial information
relating to the investment, and/or the calculated aggregated grown and
volatility of the
investment. Finally, displays are generated based on the built projection.
Note operation 358.
As shown in Figure 10, coaching and a report 360 may be provided to the
subject
to utilizing the network based on the determined performance of the
investment. Further, coaching
may be provided to the subject utilizing the network based on the obtained
financial information
relating to the investment. Note operation 362. Such network may also be used
to provide
coaching in operation 364 with the generated displays relative to personal and
financial
parameters of the subj ect.
Figure 11 is a flowchart illustrating a method for automated portfolio
generation 296
utilizing a network. Three powerful portfolio tools use the personal and
financial profile
parameters as inputs. A tool may be used to create a customized portfolio
automatically. It may
create an ideal proportional breakdown of security types based on the
customer's personal and
2o financial investment parameters. Having created a set of filters, it may
then select appropriate
securities of each type at the right level of risk and volatility, validate
the aggregated growth and
volatility, and iterate if necessary. This risk modeling tool may be used by
the user or by the live
advisor to on the customer's behalf. The risk modeling sub-system allows to
automatically
analyze an existing portfolio, or to swap stocks in and out of the portfolio
with automated
coaching or the live advisor's help.
32
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
First, in operation 272,276 & 280, financial information is received from a
subject
utilizing a network. In one embodiment of the present invention, the financial
information of the
subject includes personal investment parameters and/or financial parameters of
the subject.
Filters are then generated based on the received information of the subject in
operation
366. Thereafter, historical data is obtained on investments utilizing the
network. Note operation
368. The historical data on investments is then filtered in operation 370 with
the generated
filters. Using the filtered data, a financial portfolio may then be generated
for the subject in
operation 372. Further, the filtered data may be weighted by an asset mix
and/or risk tolerance
1o of the subject.
In operation 374 shown in Figure 12, aggregated growth and volatility may be
calculated
based on the built financial portfolio. Further, it may be determined whether
the aggregated
growth and volatility match the financial information of the subject. Note
operation 376. When
15 it is determined in decision 378 that the aggregated growth and volatility
fail to match the
financial information of the subject, the filters may be adjusted. Such
filters are adjusted until
the aggregated growth and volatility match the financial information of the
subject. Finally, in
operation 380, displays are generated based on the built financial portfolio.
2o Figure 15 illustrates a flow diagram of the process to rebalance a
portfolio 298 with the
aid of the automated coaching. In the first step the modeling system creates a
portfolio model
using either an existing portfolio or starts with a computer generated
portfolio 382. Next the user
selects security from the list of filtered securities for possible "swap" or
exchange with securities
already in the portfolio 384. The securities are filtered based on the user's
personal investment
25 parameters 262 and the user personal financial parameters 264. For example,
securities with
higher Value At Risk coefficient than the permissible user risk tolerance are
rejected. Securities
33
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
are selected from user preferred industry sectors such as electronics or
transportation. The
system obtains historical data, technical and fundamental data, and research
and breaking news
or expert opinion, all pertaining to the particular security 386. The coaching
engine converts the
data into natural language, non technical coaching strings 390. Automated
coaching provides
analyses of the technical and fundamental data and provides growth, risk and
value analysis for
each security selected 388.
After the automated coaching output, the user may elect to do a "trial swap"
of the
security and observe the impact of the swap 392. The modeling system
recalculates the portfolio
1o model including the added securities and the subtracted securities. The
system further does a
risk compliance to meet the with the user's personal investment profile 394.
Furthermore, the
new portfolio's growth and volatility are analyzed by the system and the
automated coaching
engine translates the effect of the swap on the portfolio performance in non
technical natural
language 396. If the user is satisfied with the resulting swap he may accept
it 398. If he is
15 unsatisfied with the security swap, he may reject it 400. In one embodiment
of the present
invention, the user may place an order to purchase the particular security
through the financial
modeling system, using the network.
The portfolio generation tools can be used to model and analyze a past or
present
20 portfolio. Most investment questions are addressed by analyzing the
performance of the investor
portfolio and using sophisticated analysis tools. Table 1 below illustrates an
exemplary
historical portfolio analysis in accordance with one embodiment of the present
invention.
34
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
._..._-:'~w~<'','..'." =.~.v. ~~~~ ',~~-~r~; , ~ '
... ;~t~..a %~~.J'~'-:~.~":u:'M...,-".,~.'.~e:~.~ ~ ~ p ~r : ~
a
How can 1 et a The graphic shdl~i~5?~,~e die
snapshot of ~ ~i(Liated i~i',tii~111vatua;b:
>wth curve with
graphical
~
d~~th? play the portfolio, the mean est
my ~~d d final va1ue and the
growth curve connecting them
What was my portfolioStarting mean Portfolio fluctuations make
worth estimated it hard to distinguish signal
at the beginning portfolio valuationfrom noise. The growth curve
of the period? runs right down the
central axis of the volatility
movements. Its end points
represent estimated mean initial
and current values
What was my portfolioEnding mean estimated(See above)
worth
at the end of the portfolio valuation
period?
What kind of growthCompound growth Current strategy includes choice
have I factor of securities as well as
been achieving timing and volume of investment.
with my Historical growth
current investment factor includes growth due
strategy? to both market changes and
investor capital flows. It
is calculated as a gross
geometric average percentage
change per period
Is there some way Value at Risk "On average, you have been
of exposed to a 5% chance of
measuring my risk losing $8000 on any given trading
exposure? day."
Computation to use variance/covariance
method in a
historical simulation
How do I know whetherVaR compare to
this VaR of user
level of risk is selected benchmark
high or low? indexes
and/or securities
How does my portfolioBeta relative "Your portfolio tends to track
reflect to chosen strongly in the same
changes in the benchmarks direction as the NASDAQ 500,
market? but its upward and
downward movements are more
extreme. You have
recently tracked in a direction
opposite to the DOW."
Which of the securitiesNet present contributionA list of strong and weak
performers:
in my of a breakout of
portfolio are the each security securities by compound growth
strong to current
contributors to growth
overall
growth?
How does each securityBeta analysis "Stock X is quite volatile,
of equities and but tends to move in a
contribute to overallmutual funds relativedirection opposite to the rest
risk? to of your portfolio. For this
portfolio. Equivalentreason, it tends to reduce
analysis overall risk."
for bonds
What is my return ROI: In a historical portfolio investors
on can find it hard to
investment? ~ Based on gross discriminate between the performance
cumulative of the underlying
investment securities and the impact of
moving moneys in and out.
This analysis calculates growth
net of investment flows.
Compared to equivalentIt compares portfolio growth
to the net present value of
cash flows into the cash flows at the beginning
riskless of the period in question.
Govt. Bonds They are also compared to equivalent
flows into a
Net yield comparedriskless bond. And the difference
to between actual and
riskless bonds riskless gains is calculated.
This allows calculation of
the risk premium
How are the differentYield and volatility
sectors
of my portfolio breakdown by sector
contributing to
growth and risk?
What is my tax Capital gains
exposure? and other
taxable exposure
Table 1
In another embodiment of the current invention, the financial risk management
system performs
a risk/reward analysis of a current financial portfolio. Table 2 below
illustrates an exemplary
current portfolio analysis in accordance with one embodiment of the present
invention.
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
PAGE INTENTIONALLY LEFT BLANK
io
36
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
How can I ~et a : test current Growth curve w~ifll~T;;~~~1,'c,~
snapshot of portfolio ~~~;ii, bi~t;;~t
~
my pg~~~ required period. displayed. It would be use
~~bwth? develop the
Develop compound compound growth factor as well
growth as the estimated
coefficient current mean valuation
What is my portfolioEnding mean estimated(See above)
worth
now? portfolio valuation
Is there some way Value at Risk "On average, you are now been
of (VaR) exposed to a 5%
measuring my risk chance of losing $8000 on any
given trading day."
exposure? Computation to use variance/covariance
method in
a back-tested historical simulation
of current
positions
How do I know whetherVaR compare to
VaR of
this level of risk user selected
is high or benchmark
low? indexes and/or
securities
How does my portfolioBeta relative "Your portfolio may trend to
to chosen track strongly in the
reflect changes benchmarks same direction as the NASDAQ
in the 500, but its
market? upward and downward movements
are more
extreme. You may track in a
direction opposite to
the DOW."
Which of the securitiesNet present contributionA list of strong and weak
performers:
in of a breakout
my portfolio are each security of securities by compound growth
the strong to current
contributors to growth
overall
growth?
How does each securityBeta analysis "Stock X is quite volatile,
of equities but tends to move in a
contribute to overalland mutual funds direction opposite to the rest
risk? relative of your portfolio. For
to portfolio. this reason, it tends to reduce
Equivalent overall risk."
analysis for bonds
How are the differentYield and volatility
sectors of my portfoliobreakdown by sector
contributing to
growth and
risk?
How does my historicalComparison and
contrast
portfolio performanceof volatility
compound
compare to expectedgrowth, etc.,
variously
performance of my broken down
current
portfolio?
Table 2
37
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
The present invention provides risk management and reporting capabilities for
personal
investment portfolios of stocks and bonds. The present invention allows
customers to be able to
quantify the risk associated with their equity holdings for the first time.
Most investors do not understand the likelihood of reaching their investment
goals, and
what picks they should be making to increase their chances of success. Clients
want to
understand both historical performance and possible future performance in
order to improve
decision-making. The present invention can address both, with or without
advisor support,
allowing the business to meet the aggressive growth expectations the market
values highly.
Many investors build their own spreadsheets to understand their portfolio
performance.
The present invention provides new tools to benchmark portfolio performance
and set a new
industry standard for reporting and analysis.
Preferably, the present invention is available 24 hours a day, seven days a
week and
requires no human intervention. Moreover, the present invention can inform
clients about risk
using plain language and simple graphic representations. This broadens the
target audience to
include all investors.
In one embodiment of the present invention, the historical positions of the
investments of
the user are retrieved from a database. In another embodiment, the historical
analysis of the
investments includes a calculation of a mean at endpoints of the historical
analysis.
In one aspect of the present invention, capital gains taxable exposure may be
determined
based on the historical analysis. Optionally, a compound growth factor may be
determined
based on the historical analysis. Also optionally, a Value at Risk may be
determined based on
38
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
the historical analysis utilizing a variance method computation. The Value at
Risk may also be
determined based on the historical analysis utilizing a covariance method
computation.
Figure 13 is a flowchart illustrating a method for performing risk and reward
analysis in
accordance with one possible embodiment of the present invention. First, in
operation 402 a
historical portfolio analysis of a user portfolio is performed. Then, in
operation 404, a current
portfolio analysis of the user portfolio is executed. An impact of a current
trade on the user
portfolio is then determined using the current portfolio analysis as indicated
in operation 406.
Finally, the user portfolio is forecasted and stress tested utilizing the
historical portfolio analysis.
1o See operation 408.
An efficient portfolio can deliver a required level of growth for the least
possible risk.
Two ways to achieve this are to rebalance a portfolio to favor lower risk
stocks which deliver
appropriate growth, if they exist. Another is to favor securities with
appropriate growth whose
15 volatilities move typically in opposite directions to the portfolio.
To manage risk in this way, the present invention provides the investor with
two needed
capabilities: a filter to identify candidate securities, and a tool to
quantify the risk/reward impact
of a given security transaction on the portfolio.
Trade impact analysis is conducted when the user swaps at least one security
for another
and the model recalculates the impact of the swap on the various indices.
In one embodiment of the present invention, the selected securities
characteristics include a
growth coefficient. Optionally, the selected securities characteristics may
include a correlation
to selected indexes to overall portfolio. Also optionally, the selected
securities characteristics
may include a ratio of sigma to mean portfolio valuation.
39
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
iura~evi ~~ac~;naay,:ya.uC~~=~~.'~'a; ~ecsmvanauna~G~vmuycu:m
_ 1, -
~~f_...:.:::.-m~ y~~n~,~~.~~~_.
~~:_w.~M: ~.: _
How wi~~qlgp in C th, VaR and Once the staW ngvpon ohas 6eer~'
my
positions impact volatility impact aggregated, it can be heated as
risk and of each a single
reward? proposed trade, security. The proposed trade,
both therefore, entails
absolute and relativea simple, two-element variance/covariance
to
user-selected analysis
benchmarks
How do I know whichSystem filters Modern Portfolio Theory emphasizes
list of that two
securities to use securities based volatile stocks within a portfolio
for a factors can offset
desired risk/rewardincluding: each other's volatility if they
typically move
impact? 1. positive Beta in opposite directions. This hedging
to strategy
portfolio (increasedhas been difficult for retail
investors. This will
risk) be the first commercial filter
to emphasize not
'
s Beta but its
just the magnitude of a security
2. negative Beta direction compared to the Beta
of the portfolio
(decreased risk)
3. compound growth
coefficient
In one aspect of the present invention, the selected portfolio characteristics
may include
portfolio growth. Additionally, the selected portfolio characteristics may
include Value at Risk.
Further, the selected portfolio characteristics may include a Beta. Table 3
below illustrates an
exemplary current trade impact analysis in accordance with one embodiment of
the present
invention.
to
Table 3
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
In another embodiment of the present invention, the forecast and stress
analysis is
generated by projecting a current position forward using a compound growth
factor. Optionally,
the forecast and stress analysis may be generated by projecting a current
value of the current
positions forward using a volatility from a historical portfolio analysis.
Also optionally, the
forecast and stress analysis may be generated by applying compound growth and
volatility using
back-tested parameters to determine a future portfolio value.
to In one aspect of the present invention, the forecast and stress analysis is
generated by
representing growth as an annuity with regular contributions to determine a
further portfolio
value. Additionally, a future portfolio value when future markets are
different from past markets
may be determined.
15 Given the current value, growth factor and standard deviation of the
current portfolio, it
is possible to project a value for any time in the reasonable near future.
This can be presented
graphically and alphanumerically. However, this is only valid assuming that
both underlying
market conditions and business performance of public firms do not
significantly change.
2o There are two ways to couch this forecast in a more realistic perspective:
use the
Algorithmics' Mark-to-Future calculations to test against detailed scenarios
and regimes using
Monte Carlo Simulation and values from the "Cube." Pick a few of the bearish
scenarios
currently considered by analysts: emergent inflation, divergence of old and
new economies, etc.,
and model their impacts in selected stress tests. Table 4 below illustrates an
exemplary
25 forecasting and stress testing analysis in accordance with one embodiment
of the present
invention.
41
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
What will my Syste jects current The investor's h~StciYi~a~('j
portfolio be value of ;di"~ctwlty~;;i~cl~ltlty;
Ii
worth it~ portfi ~rward using d
the compoun 1 ~ Timing and selection ides
current pattern growth factor and
of volatility from
investment activities?historical portfolio 2. Frequency of trades
analysis.
It also calculates 3. Rate of investment into
best and worst case the portfolio
using 95% confidence 4. Performance of selected
intervals. securities in the market
5. Cost of trades
Growth and volatility calculations
for the historical
portfolio will be impacted
by all of these. So the
forecast based on history
will test the performance
of
the entire combination of
factors
What would my These projection wouldMany investors achieve less
portfolio be based on than optimal results by
be worth if I: back-tested parametersover-trading. They buy high
of the current and sell low, reacting to
1. let it alone portfolio. This wouldthe morning news on impulse.
filter out the They also lower their
effect of: profitability through bloated
trading costs.
2. grew it evenlyI. Trading frequency These two calculations allows
by a the investor to
regular monthly compare the previous forecasts
amount 2. Cost of trades which include their
trading practices to the current
forecasts which do
3. Capital inflows/outflowsnot.
The first question The second forecast treats
is answered by their current portfolio as
if
applying compound it were a mutual fund in which
growth and they were dollar cost
volatility using the averaging.
back-tested
parameters.
The second is answered
by treating
growth as an annuity
with regular
contributions
What if future Stress-test calculationsMost investment advisors are
markets are could model reluctant to provide
different from some simple scenariosforecasts based on historical
the past? which would growth for well-known
affect the entire reasons. Each of the forecasts
portfolio: in the rows above
1. One or more serious~sume the future will unfold
corrections like the past. These
at random times duringstress tests are designed
the to create the appropriate
forecast interval sense of caution in the investor's
mind.
2. Long-term declines
in overall
compound growth
3. Combinations of
the above
The scenarios could
be based on the
fears and concerns
that are current
in
the market at any
given moment. For
example, current fears
include:
I. An inflationary
cycle of
unknown duration
2. A long-term divergence
of old
and new economy stocks
3. A collapse of over-valued
Internet stocks
4. Etc.
If Algorithmics methodologies
were
available, this is
where a Mark-to-
Future model would
be useful
Table 4
42
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
Figure 14 is an exemplary graphical user interface that embodies the many
systems and
methods set forth in a risk management and modeling system. As shown, the
graphical user
interface 412 includes a display icon where the user's portfolio is
graphically compared to some
user selected market indices on a risk /return graph 416. Various user
selected market indices
are also shown simultaneously on the same graph, making a comparison simple
and intuitive. A
graphical risk representation of the user's portfolio and market indices are
also displayed as a bar
graph 418. The user portfolio's return is compared in a bar graph format as
well 420. Time 422
1o is represented in a liner form in the lower portion of the graphical user
interface. Further
displayed on the graphical user interface 412 is a plurality of mode icons for
initiating various
modes of operation. By selecting the icon " How Have I Done?" 424, a graphical
representation
of the user's past performance as compared to the market is calculated and
displayed. Similarly,
selection of " How will I do?" icon 428, will result in the display of a proj
ection of the user's
15 portfolio as compared to the rest of the market. Another icon "What should
I do" 426 would
display the result of user making some security swapping to better conform the
user's portfolio
to the user's profile. Selection of "customize icon" 430 would allow the user
to change the
market indices displayed on the various graphs. The "coaching" icon 432 would
trigger
interactive coaching by displaying related coaching strings 434 in the
coaching window 436.
2o The user selects to display all or part of his portfolio by using the
selection icons 438.
It is not easy to determine how well a portfolio has performed. Typically,
investors
compare the closing valuation of one period against a previous period, say,
one year or one
quarter. So often investors may believe that they are up 60% over the previous
year. However,
25 this is seriously misleading. If, for example, the end of the end period
value reflects a temporary
43
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
upswing and the start period value represents a brief downturn, the overall
growth pattern can be
dramatically overestimated.
There are many better approaches to portfolio valuation and marginal accuracy
is
typically gained by increased computational complexity. However, a simple,
robust approach is
to fit an exponential growth curve to the data. It is intuitively obvious that
the curve passes
through the 'center' of the data. This makes it easy for the investor to
interpret the curve as the
'signal' that underlies the 'noise.' The two end points of the plot are
reasonable proxies for
mean portfolio values at each point in time. The compound growth factor in the
curve is a good
to proxy for realized compound growth. The calculation algorithm is simple and
uncontroversial.
The investor need not understand any of the math or the theory. This should be
completely invisible. The simple idea is that the security or portfolio in
question is likely to
over- or under-perform the risk bands about 1 time in 20. For any moment in
time, the investor
15 can be shown that there has been 1 chance in 20 of portfolio gains being
greater than X or losses
greater than Y.
The three lines representing central tendency and upper/lower confidence
intervals are
easy to understand and interpret on the fly. Absolute risk can be measured by
expressing
2o standard deviation as a fraction of the central tendency. This can easily
be presented on a scale.
Relative risk can be measured by comparing this statistic to similar ones for
indexes like the
DOW, S&P. etc.
In one embodiment of the present invention, the current positions of the
investments of
25 the user may be retrieved from a database. In another embodiment, the
current analysis of the
44
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
investments includes a calculation of a mean at endpoints of the current
analysis. In yet a further
embodiment, the current positions may be back tested over a predetermined time
period.
In one aspect of the present invention, a Value at Risk may be determined
based on the
current analysis utilizing a variance method computation. Optionally, a Beta
may be determined
and compared relative to selected benchmarks for the current positions.
Figure 15 is another embodiment of the graphical user interface 412. The
graphical
window 441 displays portfolio growth history over a user selected time period.
The graphical
l0 representation may include or exclude user contributions and withdrawals by
selecting the
appropriate icon 440. The actual movement of the user's portfolio is
represented by the graph
443. The graphical window 441 displays on the same graph the upside
opportunity 442, the
estimated current value 444, and the down side risk 444 and the estimated
start value 447.
Compound growth is also indicated based on the portfolio's past performance
and user inputs
15 448. Interactive coaching displays appropriate coaching strings 434 in the
coaching window
436.
The portfolio history is computed in the following manner:
The number of units of a security at time t is the difference between the sum
of units bought and
20 sum of units sold in all previous transactions
The position of a security is the number of units times the price at time t
The portfolio value at time t is the sum of all positions
The portfolio history is the time series of portfolio values for t = start
value to end value
The history includes positive and negative growth due to:
25 -Changes in the values of securities
-In and outflows of capital
The portfolio history is:
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
-stored as a vector of values
-displayed as a line graph.
Most investors do not understand the likelihood of reaching their investment
goals, and
what picks they should be making to increase their chances of success. Clients
want to
understand both historical performance and possible future performance in
order to improve
decision-making. The present invention can address both, with or without
dvisor support,
allowing the business to meet the aggressive growth expectations the market
values highly.
to The present invention helps to build a common language, metrics and tools
to quantify
risk so that the investing public can proactively manage it. The present
invention provides a
rigorous process for managing personal portfolio risk.
Preferably, the present invention is available 24 hours a day, seven days a
week and
15 requires no human intervention. Moreover, the present invention can inform
clients about risk
using plain language and simple graphic representations. This broadens the
target audience to
include all investors.
Of the various kinds of risk a private investor must face, market volatility
is central. This
2o can be measured in terms of the amount of fluctuation a security or
portfolio exhibits around a
measure of central tendency. Taking the growth curve as the central tendency,
volatility risk can
be characterized by the familiar two standard deviation bands 442 and 446
representing 95% of
measured variation.
25 Figure 16 is yet another implementation of the graphical user interface
412. In this
representation, the graphical window 450 displays a projection of the
performance of the user's
46
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
portfolio. The forecast and stress analysis of the user portfolio is generated
by one of three
method:
1- the future value is generated by projecting a current value forward using a
compound growth
factor.
2- another possible projection can be made by projecting a current value of
the current position
using volatility from a historical portfolio analysis.
3- also optionally, the forecast and stress analysis may be generated by
applying compound
growth factor and volatility using back-tested parameters to determine a
future portfolio value.
1o Of course any forecast is based on assuming that underlying market
conditions remain
the same. In one embodiment of the present invention, algorithms such as the
one by
Algorithimcs' Mark-to-FutureTM is used in calculations to test against
detailed scenarios and
regimes using Monte Carlo Simulation TM
The risk and return analysis is performed in the following manner:
The estimated start value of a portfolio at the beginning of a reporting
cycle, the estimated end
value and the compound growth factor for each period in the cycle are
calculated by fitting a
curve of the form Y=AB~X to the time series, where:
- Y = the portfolio value at time t
- A = the estimated start value of the portfolio
- B = 1 + the compound growth factor
- X = the time period, t, where t = 0 in the first period
The curve is fitting by performing linear regression on X and the natural
logarithm of Y:
- LnY=LnA+X*LnB
95% confidence intervals, the risk measures, are calculated using the standard
error of the
predicted value of Ln Y
47
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
The estimated end value of the portfolio is calculated using the regression
formula where X = the
number or periods in the reporting cycle, less 1.
Most investors do not understand the likelihood of reaching their investment
goals, and
what picks they should be making to increase their chances of success. Clients
want to
understand both historical performance and possible future performance in
order to improve
decision-making. The present invention can address both, with or without
advisor support,
allowing the business to meet the aggressive growth expectations the market
values highly.
The present invention helps to build a commom language, metrics and tools to
quantify
risk so that the investing public can proactively manage it. The present
invention provides a
rigorous process for managing personal portfolio risk.
Preferably, the present invention is available 24 hours a day, seven days a
week and
requires no human intervention. Moreover, the present invention can inform
clients about risk
using plain language and simple graphic representations. This broadens the
target audience to
include all investors.
The present invention is initiated by the client from the brokerage's Web
site. However,
2o many of the application components may reside on the client. The
application may either be
downloaded from the Web site or provided on a CD ROM. The client-side
application of the
present invention reaches out to the secure web site for required data feeds
and possibly more
complex computation. Historical customer data is stored on the client to avoid
complex data
storage issues on the server. Customers are offered a secure back-up
capability to a third party's
address. If a client wants to share information with their advisor, historical
account information
is automatically uploaded to the advisor with the client's permission.
48
CA 02389930 2002-05-O1
WO 01/33402 PCT/US00/30423
A preferred embodiment of the present invention is written using JAVATM, C,
and the
C++ language and utilizes object oriented programming methodology. Any other
Object
Oriented Programming (OOP), may be used to implement the current invention.
Moreover, the invention may be practiced with other computer systems
configurations such as
hand-held devices, multiprocessor systems, microprocessor-based or
programmable consumer
electronics, network PC's, microcomputers, and mainframe computers. The
invention also may
be practiced in distributed computing environments where tasks are performed
by remote
processing devices that are linked through a communication network. In a
distributed computing
to environment, computer programs may be located in both local and remote
memory storage
devices.
Although only a few embodiments of the present invention have been described
in detail
herein, it should be understood that the present invention might be embodied
in many other
15 specific forms without departing from the spirit or scope of the invention.
Therefore, the present
examples and embodiments are to be considered as illustrative and not
restrictive, and the
invention is not to be limited to the details given herein, but may be
modified within the scope of
the appended claims.
49
