Aligning Financial Personality and Investment Portfolios: The Portfolio Construction Framework

The Framework To Design Hyper-Personalized Portfolios

The investment framework utilized by TIFIN Personality aligns portfolios to

represent the investor’s financial personality. The individual’s financial personality is assessed through a proprietary assessment that combines personality science from positive psychology with behavioral and investment science. Once the Personality assessment is administered and completed, the investor's personality is represented through a score on four dimensions – Purpose, Security, Touch, Viewpoints (PSTV). In addition, a secondary test provides information on which elements of each dimension matter to the specific investor. For example, Purpose might be best expressed through climate change initiatives for a one investor, while on the other hand it might be expressed through gender equality for another. The investment framework detailed here designs portfolios that create investor engagement based on these personality findings. This is achieved within a portfolio construction approach of adding relevant investor-specific thematic tilts to a risk-appropriate asset allocation base. The foundational asset allocation portfolio forms the “core” while the collection of thematic tilts constitutes the “satellite” allocation. The core and satellite allocations are combined to create the final portfolio, which is also within the investor's risk band.

This summary provides additional color on the research and methodology underlying the CORE, the SATELLITE, and the OPTIMIZATION methodology.

The platform has several alternative workflows to assign the core allocation:

One option to assign the core allocation is to utilize the advisor's Active Model List: models provided by the advisor or the wealth enterprise. This is often the case with large wealth enterprises that have their own risk-profiling systems and have matched their clients to specific asset allocation models, which can then be used as the core.

Another option to assign the core allocation is to use the client’s current portfolio. This allows the advisor to simply enhance the engagement score of the existing portfolio without a material modification.

In addition, for users who need help with appropriate risk benchmarks and investment research, the TIFIN Personality software also provides suggestions that utilize best practices in asset allocation. The suggested research-based core portfolios utilize ETFs to form:

The asset classes used are equity and bond portfolios with varying mixes to accommodate different risk requirements. The funds chosen are low cost, liquid ETFs. The allocations within an asset class aim to provide a globally diversified exposure. The allocations to US, non-US developed market and EM reflect their weights in the “all country weighted index” (ACWI).

The collection of thematic tilts to reflect the investor’s financial personality forms the satellite portfolio. This is done through a 3-step approach:

Using data from the personality test, the platform first identifies the most relevant themes to drive investor engagement and interest. There are dozens of themes on the platform that vary from climate change and gender equality to AI and precision medicine. Within each dimension of PSTV, the most relevant themes for each individual is identified.

The selected themes are represented by funds most exposed to these themes. Within each dimension, the selected funds are weighted based on their risk as measured by historical standard deviation of returns. A risk-parity weighting scheme, where the weights are the inverse of the risk, is used so that each fund contributes equally to the dimension level portfolio risk. As an example, climate change and gender equality are both grouped under the PURPOSE dimension and allocated weights so that they contribute equally to risk. If they have similar historical volatility, they receive similar weights.

The various sub-portfolios specific to each dimension are now combined based on the PSTV scores derived from the financial personality test. The PSTV scores add up to 100 based on their relative importance to the individual. The dimension-specific sub-portfolios mimic the relative importance of these dimensions as well. Together, this forms the satellite allocation.

The final step to form the personalized portfolio is to add the satellite allocation to the core allocation with several constraints for compliance and risk-management. These constraints can be calibrated for the enterprise or the advisor. They are summarized as follows:

The portfolio behavior of the final combined portfolio is constrained to not deviate too far away from a benchmark. In most cases, the risk benchmark (either provided or inferred from the personality test) is used as the guardrail. This benchmark could be proxied by the client’s current portfolio, the core allocation or another specified benchmark portfolio.

Quantitatively, the deviation of the final portfolio from this risk benchmark is measured through tracking error between the two portfolios. The standard deviation of the historical return differences between the two portfolios over 3 years is the “tracking error.” This tracking error is constrained based on advisor or enterprise preference (most often at 2%).

The addition of the satellite portfolio to the core portfolio is also required to not exceed a fixed allocation (most often at 20%) and no one thematic fund is permitted to exceed a fixed allocation (most often at 5%). These constraints provide additional safety nets to ensure that portfolio behavior due to thematic additions does not create an undesirable outcome even if future return distributions are different from the past.

The investment framework at TIFIN Personality is based on the financial personality test and a quantitative risk-managed portfolio construction framework. The framework adds personalized thematic tilts to a core asset allocation model to design hyper-personalized portfolios within user specified risk guardrails.