Financial advisory system

• US 20060010060A1
• Filed: 09/02/2005
• Published: 01/12/2006
• Est. Priority Date: 12/02/1997
• Status: Active Grant

• Current Assignee: Financial Engines, LLC.
• Original Assignee: Financial Engines Incorporated (Edelman Financial Engines LLC)
• Inventors: Jones, Christopher L., Park, Ronald T., Watson, John G., Sharpe, William F., Scott, Jason S., Bekaert, Geert, Maggioncalda, Jeff N., Grenadier, Steven R.
• Granted Patent: US 7,788,155 B2
• Time in Patent Office: Days
• US Class Current: 705/35
• CPC Class Codes: G06Q 40/00 Finance; Insurance; Tax strategies; Processing of corporate or income taxes
• CPC Class Codes: G06Q 40/02 Banking, e.g. interest calculation or account maintenance credit or loans G06Q40/03
• CPC Class Codes: G06Q 40/04 Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis
• CPC Class Codes: G06Q 40/08 Insurance

Abstract

A financial advisory system is provided. According to one aspect of the present invention, return scenarios for optimized portfolio allocations are simulated interactively to facilitate financial product selection. Return scenarios for each asset class of a plurality of asset classes are generated based upon estimated future scenarios of one or more economic factors. A mapping from each financial product of an available set of financial products onto one or more asset classes of the plurality of asset classes is created by determining exposures of the available set of financial products to each asset class of the plurality of asset classes. In this way, the expected returns and correlations of a plurality of financial products are generated and used to produce optimized portfolios of financial products. Return scenarios are simulated for one or more portfolios including combinations of financial products from the available set of financial products based upon the mapping.

Claims

1. A method comprising:

one or more processors determining feasible exposures to a plurality of asset classes achievable by a particular investor by determining a combination of one or more asset classes and proportions thereof that characterize future performance of each financial product of a set of financial products available to the particular investor for investment; and

identifying a recommended efficient portfolio of financial products from the set of financial products by maximizing an expected utility of wealth for the particular investor based upon the feasible exposures.

2. The method of claim 1, further comprising modeling expected future asset class returns as a function of one or more economic factors by generating return scenarios for each asset class of the plurality of asset classes based upon future scenarios of the one or more economic factors.

3. The method of claim 1, wherein said determining a combination of one or more asset classes and proportions thereof that characterize future performance of each financial product of a set of financial products comprises performing returns-based style analysis.

4. The method of claim 1, wherein said determining a combination of one or more asset classes and proportions thereof that characterize future performance of each financial product of a set of financial products comprises surveying the underlying assets held in the financial product.

5. The method of claim 1, wherein said determining a combination of one or more asset classes and proportions thereof that characterize future performance of each financial product of a set of financial products comprises obtaining exposure information based on a target benchmark associated with the financial product.

6. The method of claim 1, wherein said determining a combination of one or more asset classes and proportions thereof that characterize future performance of each financial product of a set of financial products comprises categorizing exposures based on standard industry classification schemes.

7. The method of claim 1, further comprising forecasting the probability of the particular investor meeting an identified financial goal based upon the recommended efficient portfolio.

8. The method of claim 1, further comprising receiving information indicative of the particular investor'"'"'s risk tolerance.

9. The method of claim 8, wherein said maximizing an expected utility of wealth for the particular investor comprises determining expected returns and volatility of the expected returns for each of a plurality of efficient portfolios comprising a combination of one or more financial products from the set of financial products based upon said determining a combination of one or more asset classes and proportions thereof that characterize future performance of each financial product.

10. The method of claim 1, wherein the set of financial products available to the particular investor for investment comprises financial products offered through an employee-directed defined contribution plan.

11. A method comprising:

determining feasible exposures to a plurality of asset classes achievable by a particular investor by determining a combination of one or more asset classes and proportions thereof that characterize future performance of each financial product of asset of financial products available to the particular investor for investment; and

one or more processors identifying a recommended efficient portfolio of financial products from the set of financial products by maximizing an expected utility of wealth for the particular investor based upon the feasible exposures.

12. The method of claim 11, further comprising modeling expected future asset class returns as a function of one or more economic factors by generating return scenarios for each asset class of the plurality of asset classes based upon future scenarios of the one or more economic factors.

13. The method of claim 11, wherein said determining a combination of one or more asset classes and proportions thereof that characterize future performance of each financial product of a set of financial products comprises performing returns-based style analysis.

14. The method of claim 11, wherein said determining a combination of one or more asset classes and proportions thereof that characterize future performance of each financial product of a set of financial products comprises surveying the underlying assets held in the financial product.

15. The method of claim 11, wherein said determining a combination of one or more asset classes and proportions thereof that characterize future performance of each financial product of a set of financial products comprises obtaining exposure information based on a target benchmark associated with the financial product.

16. The method of claim 11, wherein said determining a combination of one or more asset classes and proportions thereof that characterize future performance of each financial product of a set of financial products comprises categorizing exposures based on standard industry classification schemes.

17. The method of claim 11, further comprising forecasting the probability of the particular investor meeting an identified financial goal based upon the recommended efficient portfolio.

18. The method of claim 11, further comprising receiving information indicative of the particular investor'"'"'s risk tolerance.

19. The method of claim 18, wherein said maximizing an expected utility of wealth for the particular investor comprises determining expected returns and volatility of the expected returns for each of a plurality of efficient portfolios comprising a combination of one or more financial products from the set of financial products based upon said determining a combination of one or more asset classes and proportions thereof that characterize future performance of each financial product.

20. The method of claim 11, wherein the set of financial products available to the particular investor for investment comprises financial products offered through an employee-directed defined contribution plan.

21. A computer-readable storage medium containing a set of instructions capable of causing one or more processors to:

determine feasible exposures to a plurality of asset classes achievable by a particular investor by determining a combination of one or more asset classes and proportions thereof that characterize future performance of each financial product of a set of financial products available to the particular investor for investment; and

identify a recommended efficient portfolio of financial products from the set of financial products by maximizing an expected utility of wealth for the particular investor based upon the feasible exposures.

22. The computer-readable storage medium of claim 21, containing a further set of instructions capable of causing one or more processors to model expected future asset class returns as a function of one or more economic factors by generating return scenarios for each asset class of the plurality of asset classes based upon future scenarios of the one or more economic factors.

23. The computer-readable storage medium of claim 21, containing a further set of instructions capable of causing one or more processors to forecast the probability of the particular investor meeting an identified financial goal based upon the recommended efficient portfolio.

24. The computer-readable storage medium of claim 21, containing a further set of instructions capable of causing one or more processors to receive information indicative of the particular investor'"'"'s risk tolerance.

25. A method comprising:

identifying a relationship between returns of each financial product of a set of financial products that are available to a particular investor for investment and returns of combinations of one or more factor asset classes of a set of factor asset classes by performing an exposure analysis on each financial product of the set of financial products;

one or more processors determining expected returns and volatility of returns for each of a plurality of efficient portfolios based upon the relationship, each of the plurality of efficient portfolios including a combination of one or more of the financial products from the set of financial products; and

identifying a recommended portfolio of the plurality of efficient portfolios by selecting an efficient portfolio of the plurality of efficient portfolios that maximizes an expected utility of wealth for the particular investor.

26. The method of claim 25, further comprising:

forecasting returns associated with each core asset class of a set of core asset classes by generating core asset class scenarios based upon future scenarios of one or more economic factors with an equilibrium econometric model; and

forecasting returns associated with each factor asset class of the set of factor asset classes by generating factor model asset scenarios based upon the core asset class scenarios.

27. The method of claim 25, wherein said performing an exposure analysis on each financial product of the set of financial products comprises performing returns-based style analysis.

28. The method of claim 25, wherein said performing an exposure analysis on each financial product of the set of financial products comprises surveying the underlying assets held in the financial product.

29. The method of claim 25, wherein said performing an exposure analysis on each financial product of the set of financial products comprises obtaining exposure information based on a target benchmark associated with the financial product.

30. The method of claim 25, wherein said performing an exposure analysis on each financial product of the set of financial products comprises categorizing exposures based on standard industry classification schemes.

31. The method of claim 25, further comprising forecasting the probability of the particular investor meeting an identified financial goal based upon the recommended efficient portfolio.

32. The method of claim 25, further comprising receiving information indicative of the particular investor'"'"'s risk tolerance, and wherein said maximizing an expected utility of wealth for the particular investor takes into consideration the information indicative of the particular investor'"'"'s risk tolerance and information regarding expected returns and volatility of the expected returns for each of a plurality of efficient portfolios comprising a combination of one or more financial products from the set of financial products that is generated based upon the relationship.

33. The method of claim 25, wherein the set of financial products available to the particular investor for investment comprises financial products offered through an employee-directed defined contribution plan.

34. A computer-readable storage medium containing a set of instructions capable of causing one or more processors to:

identify a relationship between returns of each financial product of a set of financial products that are available to a particular investor for investment and returns of combinations of one or more factor asset classes of a set of factor asset classes by performing an exposure analysis on each financial product of the set of financial products;

determine expected returns and volatility of returns for each of a plurality of efficient portfolios based upon the relationship, each of the plurality of efficient portfolios including a combination of one or more of the financial products from the set of financial products; and

identify a recommended portfolio of the plurality of efficient portfolios by selecting an efficient portfolio of the plurality of efficient portfolios that maximizes an expected utility of wealth for the particular investor.

35. A method comprising:

a step for determining feasible exposures to a plurality of asset classes achievable by a particular investor based upon a set of financial products available to the particular investor for investment; and

a step for identifying a recommended efficient portfolio of financial products from the set of financial products.

36. The method of claim 35, further comprising a step for modeling expected future asset class returns as a function of one or more economic factors;

37. A method comprising:

a step for identifying a relationship between returns of each financial product of a set of financial products that are available to a particular investor for investment and returns of combinations of one or more factor asset classes of a set of factor asset classes;

a step for determining expected returns and volatility of returns for each of a plurality of efficient portfolios based upon the relationship, each of the plurality of efficient portfolios including a combination of one or more of the financial products from the set of financial products; and

a step for identifying a recommended portfolio of the plurality of efficient portfolios.

38. The method of claim 37, further comprising:

a step for forecasting returns associated with each core asset class of a set of core asset classes by generating core asset class scenarios based upon future scenarios of one or more economic factors with an equilibrium econometric model; and

a step for forecasting returns associated with each factor asset class of the set of factor asset classes based upon the core asset class scenarios.

39. A method comprising:

forecasting returns associated with each core asset class of a set of core asset classes by generating core asset class scenarios based upon future scenarios of one or more economic factors with an equilibrium econometric model;

one or more processors forecasting returns associated with each factor asset class of a set of factor asset classes by generating factor model asset scenarios based upon the core asset class scenarios;

identifying a relationship between future returns of each financial product of a set of financial products that are available to a particular investor for investment and future returns of combinations of one or more factor asset classes of the set of factor asset classes by determining each financial product'"'"'s effective asset mix with respect to the set of factor asset classes;

determining expected returns and volatility of returns for each of a plurality of efficient portfolios based upon the relationship, each of the plurality of efficient portfolios including a combination of one or more of the financial products from the set of financial products; and

identifying a recommended portfolio of the plurality of efficient portfolios by selecting an efficient portfolio of the plurality of efficient portfolios that maximizes an expected utility of wealth for the particular investor.

40. A computer-readable storage medium containing a set of instructions capable of causing one or more processors to:

forecast returns associated with each core asset class of a set of core asset classes by generating core asset class scenarios based upon future scenarios of one or more economic factors with an equilibrium econometric model;

forecast returns associated with each factor asset class of a set of factor asset classes by generating factor model asset scenarios based upon the core asset class scenarios;

identify a relationship between future returns of each financial product of a set of financial products that are available to a particular investor for investment and future returns of combinations of one or more factor asset classes of the set of factor asset classes by determining each financial product'"'"'s effective asset mix with respect to the set of factor asset classes;

determine expected returns and volatility of returns for each of a plurality of efficient portfolios based upon the relationship, each of the plurality of efficient portfolios including a combination of one or more of the financial products from the set of financial products; and

identify a recommended portfolio of the plurality of efficient portfolios by selecting an efficient portfolio of the plurality of efficient portfolios that maximizes an expected utility of wealth for the particular investor.