WO2001088743A2

WO2001088743A2 - Automated investment suitability gauge

Info

Publication number: WO2001088743A2
Application number: PCT/US2001/015737
Authority: WO
Inventors: Hans-Linhard Reich
Original assignee: Goldman Sachs & Co.
Priority date: 2000-05-15
Filing date: 2001-05-15
Publication date: 2001-11-22
Also published as: AU2001263159A1

Description

AUTOMATED INVESTMENT SUITABILITY GAUGE

CROSS-REFERENCE TO RELATED APPLICATION

This application claims the benefit of provisional application entitled "Automated Investment Suitability Gauge," filed May 15, 2000, bearing the Serial No. 60/204,351 and utility application filed May 22, 2000 bearing the Serial No. 09/576,089 the contents of which are relied upon and incorporated by reference.

BACKGROUND

This invention relates to a method and system for providing advice regarding the suitability for an online trade, investment or account portfolio. In particular, the present invention relates to automatically analyzing a potential investment or account portfolio and gauging whether the investment is consistent with an investor's trading experience and investment objectives and the effect on an account portfolio.

Traditionally, a financial advisor or broker provides trading advice to an investor relating to potential investments. Regulatory authorities require that registered representatives comply with rules relating to the suitability arising out of a particular trade or investment recommendation, as that relates to a particular investor. In the traditional broker/dealer environment, the suitability is left up to the registered representative's judgment, relying on his or her knowledge of the markets and the investor.

Typically, a registered representative will interview an investor to determine factors such as the amount of investment experience an investor may have, the net worth of the individual, the amount of discretionary funds available to the individual and the investment objectives of the individual. Investment objectives can include an ultimate goal, such as retirement or funding higher education, or a more specific goal such as a certain percentage for a return on investment. A registered representative can then consider this information while forming specific investment advice for the individual involved.

Typically, advice from a registered representative to an individual is accomplished through conversation, wherein the conversation may take place in person or via a telephone. The human interaction of a conversation can also be used to update a registered representative concerning the individual's investment goals or other changes relating to the investment position of the individual.

With the advent of online trading, the role of personal interaction is greatly reduced in the trading forum. Online trading involves an individual performing a trading transaction using a personal computer or other electronic device, wherein the individual can perform the transaction without the traditional interaction with a registered representative. Consequently, advice as to suitability that was rendered by the registered representative's discretion is not available. What is needed is a vehicle to perform a suitability determination that can be applied to online trading.

SUMMARY

Accordingly, the present invention provides a method and system to gauge the suitability of an investment for a particular investor based on the portfolio, objective chosen by the investor or recommended by the system. Computer systems can be utilized to create an investor profile and process investor interactions. Software routines can relate potential investments to an investor's portfolio, as well as the investor's profile and investment objectives, to gauge a proposed or executed investment relative to the portfolio objective (suitability).

A computer-implemented method can be used to ascertain the suitability of an investment for an investor by creating an investor profile and gauging a suitability classification for the investor based upon data in the investor profile. A risk category can be assigned for an investment and advice is generated, or otherwise provided, relating to the suitability of the investment for the investor, wherein the advice considers the suitability classification of the investor and the risk tolerance category of the investment.

Data relating to transactions executed by the investor can also be collected and stored in the investor profile. Such data can then be used to better generate advice and/or research which can be provided to the investor. Advice can be provided in response to a request received from the investor via an online connection, wherein the advice is responsive to the request based upon data contained in the investor profile.

In another aspect of the invention, a portfolio of investments owned by the investor can be assembled online such that a risk associated with an aggregate of the investments contained in the portfolio can be calculated. Advice can then be provided for, based upon the suitability of an investment according to the risk category of the investment, the calculated risk associated with the aggregate of investment contained in the portfolio, and the suitability classification of the investor.

The suitability classification of the investor can be based upon a risk tolerance of the investor, while the risk tolerance can be calculated based upon portfolio allocation amongst multiple risk categories. Risk categories can include, for example, a conservative/moderate category, a moderate/aggressive category and an aggressive category. In other embodiments, the suitability classification of the investor can be based upon a risk associated with a product or upon a risk associated with a transaction.

The present invention can also be embodied as a computer system for providing advice relating to financial transactions. Typically the system includes a computer server accessible with a network access device via a communications network. Executable software stored on the server can be executed on demand via the network access device. The software can be operative with the server to cause the system to create an investor profile and gauge a suitability classification for the investor based upon data in the investor profile. The system can also assign a risk category for an investment and provide advice relating to the suitability of an investment for the investor. The advice can consider the suitability classification of the investor and the risk tolerance category of the investment. The network access device can be a computer or other electronic device which is operable over the network. The network can adhere to a known protocol such as the transmission control protocol/internet protocol.

The present invention can also be embodied on a computer readable medium, such as a disc drive, CD or DVD medium, or embodied as a computer signal, such as a digital data stream receivable by a computer.

One aspect of the invention can include a method of interacting with a network access device so as to receive advice relating to the suitability of an investment. This aspect can include accessing a server on a communications network via a network access device. Once access is established, data descriptive of an investor profile can be transmitted to the server, as well as data relating to an investment objective and data relating to a proposed investment. A message relating to the suitability of the proposed investment based upon the investor profile and investment objective can then be received.

Details of one or more embodiments of the invention are set forth in the accompanying drawings and the description below. Implementations can provide advantages such as compliance with regulatory requirements, enhanced supervision and recordation of supervision, as well as increased protection and service to an investor. Other features, objects, and advantages of the invention will be apparent from the description, the drawings and the claims.

DESCRIPTION OF THE DRAWINGS Figure 1 illustrates the components of a computer network system. Figure 2 illustrates a flow of an investment suitability method. Figure 3 illustrates an exemplary investor profile. Figure 4 illustrates an exemplary product classification chart. Figure 5 illustrates a chart containing investment types and suitability messages. Figure 6 illustrates graph of risk tolerance and investment type.

DETAILED DESCRIPTION An automated suitability classification and advice method or system can gauge and provide a basis to advise whether an investment is suitable to an investor via a computer communications network. Taking into account the status of an investor, the investor's trading objectives, the type of investment, the contents of an investor's portfolio and other data, automated suitability classification and advice system can warn an investor or registered representative concerning a particular investment or strategy and analyze the effect of a particular proposed or executed investment on the investor's portfolio. Additionally, the automated suitability classification and advice system can be used to examine the trend of a particular investment or portfolio pattern over time. An automated suitability classification and advice method or system can also block an investment, or take other predetermined actions regarding a trade.

Fig. 1 shows a network of computers 100 that may be used in an implementation of an automated suitability classification and advice system. The network 100 includes a system 150 and investor computers 101-106. Each of the investor computers can include a processor, memory, a user input device, such as a keyboard and/or mouse, and a user output device, such as a video display and/or printer. The investor computers 101-106 can communicate with the system 150 to obtain data stored at the system 150, such as investment data or suitability data. The investor computer 101-106 may interact with the computer 150 as if the host was a single entity in the network 100. However, the system 150 may include multiple processing and database sub-systems, such as cooperative or redundant processing and/or database servers 141-144, which can be geographically dispersed throughout the network 100. In some implementations, groups of investor computers 104-106 may communicate with host 150 through a local server 170. The local server 170 may be a proxy server or a caching server. Server 170 may also be a co-host server that can serve trading content, and provide services such as investment suitability and investor profiling to a user at investor computers 104-106.

An investor can access the system 150 using communications software executed at the investor's computer 101-106. The communications software may include a generic hypertext markup language (HTML) browser, such as Netscape Navigator or Microsoft Internet Explorer (a "WEB browser"). The investor software may also be a proprietary browser, and/or other host access software. In some cases, an executable program, such as a Java™ program, may be downloaded from the host 150 to the investor computer and executed at the investor computer as part of the on-line course.

A block diagram of a flow representing an exemplary automated suitability process is illustrated in Fig. 2. The process can include creating a profile relating to an investor 210 wherein the profile includes information relating to the investor's financial position and objective in investing. A suitability classification can be gauged for the investor 211 based upon the data contained in the investor profile.

From an investment perspective, the automated suitability classification system can assign a risk category to an investment and/or a potential investment. As described further below, the risk category can range from a conservative/moderate investment to an aggressive investment. The automated suitability classification system can also compile a portfolio of investments owned by the investor 213. A risk associated with the portfolio aggregate can be calculated 214 based upon the individual components of the portfolio.

With reference to the investor's suitability classification, and a current risk associated with the investor's portfolio aggregate, the automated suitability classification system can gauge the suitability of a particular investment for an investor 215. The determination can be calculated based upon the effect a proposed investment will have upon the risk associated with the portfolio aggregate and an analysis of whether that effect would be contrary to the investor's stated investing objective.

The automated suitability classification system is also capable of generating advice that is specific to an investor as well as the investor's current financial position. Advice can be displayed in a pop up window on an investor network access device 101-106, or in a designated area of a graphical user interface used to implement the invention, as discussed further below. In addition, records of advice presented to an investor can be stored in a history file for future reference or e-mailed to an investor. Advice can be generated in response to an investor inquiry, or in response to an investor attempting to consummate a transaction. In addition, an automated suitability classification system can generate advice based upon a change in an investor's position, or a change in the market.

In one embodiment, an investor can have the option of regulating advice generated by the automated suitability classification system. For example, an investor may wish to instruct the system not to propagate a particular type of message in the future unless specifically instructed to do so. Alternatively, an investor can select a level of advice generation, wherein a selection designating a high level of advice can propagate messages that are context sensitive and relate to almost any action an investor may take and a low level of advice may cause messages to only appear if a stated objective of the investor is about to be violated.

Referring now to Fig. 3, an automated suitability classification and advice system can categorize an investor wherein the categorization is based upon an investor profile 300 containing data describing the investor. In addition, the suitability classification system can plot investments and track the investments as they relate to the investor category. The system can also monitor transactions on a trade by trade basis to further build the investor profile and analyze the investor's overall portfolio over time. Actions, which fall outside the investor category, can be flagged to warn and/or block the investor from taking the action. In addition, whereas a history of investor actions can be stored as part of the investor profile, an investor's ongoing tendency towards similar actions can be analyzed. If warranted, the investor's category can be changed based upon data accumulated in the investor's profile. The updated investor category can be made to more closely match the investor's intentions, as evidenced by the history of actions.

Updating of the investor's category can be accomplished on a predetermined schedule, such as on an annual or biannual basis. In addition, the category can be updated in response to a change in the investor's position, an investor becoming more educated in relation to the markets, a change in the markets, or any other material factors that could affect the suitability of an investment for an investor. The investor can also request to update his or her profile, such that a new category can be assigned as a result of the changes, or specifically chosen by the investor.

A profile 300 relating to an investor can include data 311-317 that is relevant to the types of investment transactions an investor should participate in, in order to meet the investment objectives. For example, an investor profile can include the employment status 311 of the investor, such as whether the investor is, employed and a position held, not employed, self-employed and the type of business, retired, homemaker, student, or other description of the investor's employment status. In addition, the investor profile can include an estimated annual income 312, a liquid net worth 313, a total net worth 314, and an investment history 315. The investment history might include, for example, information relating to equities or fixed income investments in which the investor participated, short sales, commodities or futures investments, options 316 including a covered call writing, a cash secured equity put writing, or a protective equity put buying, buying, spreading or uncovered writing.

In one embodiment, a weighting system can be used to assign points into categories describing suitability classes, wherein the points are assigned according to the data entered into the investor profile by either the investor or registered representative. For example, suitability classes can be broken down into categories including a conservative category, a moderate category, and an aggressive category. Points can be assigned to each category- based upon the data entered into the profile. Points can also be assigned according to the investment objectives 317 of an investor. Objectives 317 can include conservative/moderate, moderate/aggressive or aggressive. The investment objectives 317 can also be made part of the investor profile 300. An aggregation of the points 318 in graduated categories 320-322 can be totaled, and used to assign a suitability classification for the investor.

In one embodiment, an investor can override, or otherwise change, an automatically assigned suitability class. Change of a suitability classification can be accomplished online tlirough a graphical user interface (GUI) displayed on a network access device 101-106, or by instruction to a registered representative of a trading institution. An investor may wish to override an assigned suitability classification temporarily, or on a permanent basis. For example, an investor may wish to engage in more aggressive transactions without the interruption of advice normally associated with the investor's assigned suitability class. The investor may choose to do so only for a short period of time during a unique set of market conditions. Conversely, an investor may wish to take advantage of a higher level of advice that is available with a different class on a regular basis, whereby the system is further used as an investment tool.

The automated suitability classification and advice system can also create an audit trail documenting an investor's suitability class. An audit trail can be useful in justifying different types of transactions with which an investor may become involved. A permanent record can be made from the audit trail wherein the permanent record can be updated on a periodic basis, or as a result of any changes that occur. The permanent record can include how an investor was initially assigned to a class, and also include an investor's request to change a classification, whether the change is effected online, or through a registered representative. The audit trail can be made available to an investor for investor review, and/or forwarded to the investor on a periodic basis. In addition, the audit trail can be used to satisfy regulatory requirements.

Referring now to Fig. 4, a suitability program can include a collection of data listing investment product types 411 and a suitability classification 412 or risk classification associated with each investment product type. Suitability/risk classifications can be further defined to include speculation and %TBD 413 or without speculation 414. Classifications can include, for example, a conservative moderate classification, a moderate aggressive classification and an aggressive classification. Product, transaction types or account types can, by way of example and without limitation, include: U.S. Treasuries and Agencies; money markets; cash equivalents; investment grade municipals; non investment grade municipals; conservative mutual funds 426; growth and income mutual funds; aggressive growth mutual funds; speculative mutual funds; equity recommended lists 430, followed securities; followed Standard and Poors components; Standard and Poors SEC rated B+ or greater; non followed securities rated B+ or less; U.S. non NASDAQ non listed NMS; equities 435; options 436; Initial Public Offerings (IPOs); investment funds; OTC derivatives/options 439; cash accounts 441; margin accounts 442; short accounts 443; and other transaction types 444.

Referring now to Figure 5, a chart 500 illustrates responses an automated suitability classification and advice program can offer an investor pertaining to a proposed investment. Responses can include, for example, a block 511 on an investment, an alert equivalent to a compliance advisory 512, or a warning equivalent to a client advisory 513. In addition, an automated suitability classification and advice program can generate an appropriate response contingent upon various data within the investor profile. Generation of a response contingent upon a user's profile can allow the system to block a proposed trade for a conservative investor, and allow an investor whose profile indicates speculation as an investment objective, to only receive a warning. Responses can also include advice indicating that a proposed trade is not consistent with an investment objective stated in the user's profile and yet still offer the investor an option to continue with the trade.

In one embodiment, a GUI for an automated suitability classification and advice system can include data relating to investments and an investors profile, as well as system generated messages, including warnings relating to the investor's position and/or potential investments. A programmable interactive device, such as a yes/no box or other interactive device capable of turning off warnings can also be included. If desired, an investor can be given an option to turn off any warnings, whereby the investor can proceed with investments without intervention by the system in the form of presenting warnings to the investor.

Additionally, statistical analysis and applications can be employed to calibrate suitability, whereby an automated suitability classification and advice system can periodically gauge classifications based upon peer group objectives, statistical distribution and analysis. For example, an automated suitability classification and advice system can be programmed to track a run rate of portfolio turnover, wherein a limit such as 3 times turnover annually may be within parameters while turnover of greater than 3 times annually would not be within parameters. Turnover outside of parameters can be brought to the attention of an investor as well as a registered representative in the form of a warning message.

Analysis can also include tracking patterns generated over time by an investor. Patterns can be used, for example, to provide targeted research to an investor, wherein the research relates to the types of investments supported by the investor's patterns. Analysis can also track a successful portfolio in the sense that a portfolio matches an investor's objectives for investing. For example, a conservative portfolio that provides a high rate of return can be analyzed and emulated. In addition, a portfolio can be analyzed from the perspective of containing a mix of investments, such as a position in conservative investments and a position in more aggressive positions, and/or domestic and foreign investments.

Referring now to Fig. 6, by way of example, a chart illustrating the risk tolerance of an investor and the risk level of investment is shown. Beginning with high risk investors 610, and graduating towards low risk investors 617, examples of investors can include: hedge funds 611, investment advisors 612, corporations 613, pensions and foundations 614, guardians and custodians 615, and estates and trusts 616. More specific examples, also graduating from a high risk investor to a low risk investor, can include: a day trader, or a wealthy individual or experienced investor 621; a wealthy individual with limited experience 622; a wealthy individual that is inexperienced 623; an individual who is experienced but with limited resources 624; an individual with limited resources and limited experience 625; an individual with limited resources and no experience.

Likewise, transaction types or transaction strategies can be charted according to a risk level for the investment. A low risk level bubble 630, suitable to a conservative or moderate investor might include: U.S. Treasuries and Agencies; money markets; conservative mutual funds; investment grade corporate bonds; preferred or munies; private client focus securities; OAP1 options with protective puts; cash or margin accounts. A second bubble 631 can move into moderate or aggressive risk level investment products and might include: growth and income mutual funds; S&P components; S&P securities rated B+ or better; OAP2 and OAP3 option and also cash and margin accounts. A bubble of solidly moderate aggressive risk level investments 632 can include: non followed securities; non followed international equities; initial public offerings (IPOs); aggressive growth mutual funds; private placements; equities with a beta greater than one; OAP3 options; short term trading; short sells; and cash margin and short account types. A more aggressive risk level investment bubble 633 might include: non investment grade corporate bonds; fixed income products; preferred and munies; securities under $5.00 a share; emerging market debt; investment funds; speculative mutual funds; over the counter derivatives and options; distressed debt; OAP4 options and all account types.

The invention may be implemented in digital electronic circuitry, or in computer hardware, firmware, software, or in combinations of them. Apparatus of the invention may be implemented in a computer program product tangibly embodied in a machine-readable storage device for execution by a programmable processor; and method steps of the invention may be performed by a programmable processor executing a program of instructions to perform functions of the invention by operating on input data and generating output.

The method for investment suitability for delivery over the WEB can be developed in conjunction with qualified financial institutions. A financial institution can provide investment data and advice pertaining to investments, as well as a platform and vehicle for carrying out trades or other investments.

The invention may advantageously be implemented in one or more computer programs that are executable on a programmable system including at least one programmable processor coupled to receive data and instructions from, and to transmit data and instructions to, a data storage system, at least one input device, and at least one output device. Each computer program may be implemented in a high-level procedural or object-oriented programming language, or in assembly or machine language if desired; and, in any case, the language may be a compiled or interpreted language. Suitable processors include by way of example, both general and special purpose microprocessors.

Computers 101-106 131-132, 141-144 in an investment suitability system may be connected to each other by one or more network interconnection technologies. For example dial-up lines, token-ring and/or Ethernet networks 110, 140, Tl lines, asynchronous transfer mode links, wireless links and integrated service digital network (ISDN), digital subscriber line connections may all be combined in the network 100. Other packet network and point- to-point interconnection technologies may also be used. Additionally, the functions associated with separate processing and database servers in the host 150 may be integrated into a single server system or may be partitioned among servers and database systems that are distributed over a wide geographic area.

A number of embodiments of the present invention have been described. Nevertheless, it will be understood that various modifications may be made without departing from the spirit and scope of the invention. For example, investor computers 101-106 can comprise a personal computer executing an operating system such as Microsoft Windows™, Unix™, or Apple MacOS™, as well as software applications, such as a web browser. Investor computers 101-106 can also be terminal devices, a palm-type computer WEB access device that adhere to a point-to-point or network communication protocol such as the Internet protocol. Other examples can include TV WEB browsers, terminals, and wireless access devices (such as a 3-Com Palm VII organizer). An investor computer may include a processor, RAM and/or ROM memory, a display capability, an input device and hard disk or other relatively permanent storage. Accordingly, other embodiments are within the scope of the following claims.

Claims

CLAIMS What is claimed is:

1) A computer-implemented method for ascertaining the suitability of an investment for an investor, the method comprising: creating an investor profile; gauging a suitability classification for the investor based upon data in the investor profile; assigning a risk category for an investment; and generating advice relating to the suitability of an investment for the investor, wherein the advice considers the suitability classification of the investor and the risk tolerance category of the investment.

2) The method of claim 1 additionally comprising storing data relating to transactions executed by the investor, in the investor profile.

3) The method of claim 1 additionally comprising receiving a request from the investor via an online connection and responding to the request based upon data contained in the investor profile.

4) The method of claim 1 additionally comprising creating a portfolio of investments owned by the investor.

5) The method of claim 4 additionally comprising calculating a risk associated with an aggregate of the investments contained in the portfolio.

6) The method of claim 5 additionally comprising providing advice relating to the suitability of an investment based upon the risk category of the investment, the calculated risk associated with the aggregate of investment contained in the portfolio, and the suitability classification of the investor.

7) The method of claim 1 wherein the suitability classification of the investor is based upon a risk tolerance of the investor.

8) The method of claim 7 wherein the risk tolerance is calculated based upon portfolio allocation amongst multiple risk categories.

9) The method of claim 8 wherein the risk categories comprise: a conservative/ moderate category; a moderate/aggressive category; and an aggressive category. 10) The method of claim 1 wherein the suitability classification of the investor is based upon a risk associated with a product.

11) The method of claim 1 wherein the suitability classification of the investor is based upon a risk associated with a transaction.

12) The method of claim 1 or 2 additionally comprising the step of generating research directed to the investor, wherein the research is related to the data in the investor profile.

13) The method of claim 1 additionally comprising calibrating suitability of an investment for an investor in accordance with peer group objectives.

14) The method of claim 13 wherein the peer group objective comprises an annual turnover parameter.

15) A computer system for providing advice relating to financial transactions, the system comprising: a computer server accessible with a network access device via a communications network; and executable software stored on the server and executable on demand via the network access device, the software operative with the server to cause the system to: create an investor profile; gauge a suitability classification for the investor based upon data in the investor profile; assign a risk category for an investment; and provide advice relating to the suitability of an investment for an investor, wherein the advice considers the suitability classification of the investor and the risk tolerance category of the investment.

16) The computer communications system of claim 15 wherein the network access device comprises a computer.

17) The computer system of claim 15 wherein the communication network conforms to the transmission control protocol/internet protocol.

18) The computer communications system of claim 15 wherein the software operative with the server additionally causes the system to: provide advice relating to the suitability of an investment based upon the risk category of the investment, a calculated risk associated with the aggregate of investment contained in the portfolio, and the suitability classification of the investor. 19) Computer executable program code residing on a computer-readable medium, the program code comprising instructions for causing the computer to: create an investor profile; gauge a suitability classification for the investor based upon data in the investor profile; assign a risk category for an investment; and provide advice relating to the suitability of an investment for an investor, wherein the advice considers the suitability classification of the investor and the risk tolerance category of the investment.

20) The computer executable program of claim 19 wherein the program code additionally causes the computer to: create a portfolio of investments owned by the investor and calculate a risk associated with the portfolio aggregate.

21) The computer executable program of claim 19 wherein the computer communications network adheres to the Transmission Control Protocol/Internet Protocol network.

22) A method of interacting with a network access device so as to receive advice relating to the suitability of an investment, the method comprising the steps of: accessing a server on a communications network via a network access device; transmitting data comprising an investor profile to the server; transmitting data relating to an investment objective; transmitting data relating to a proposed investment; and receiving a message relating to the suitability of the proposed investment based upon the investor profile and investment objective.

23) A computer data signal embodied in a digital data stream comprising data relating to investment suitability, wherein the computer data signal is generated by a method comprising the steps of: creating an investor profile; gauging a suitability classification for the investor based upon data in the investor profile; assigning a risk category for an investment; and providing advice relating to the suitability of an investment for an investor, wherein the advice considers the suitability classification of the investor and the risk tolerance category of the investment. 4) A computer data signal embodied in a digital data stream comprising data relating to investment suitability, wherein the computer data signal is generated by a method comprising the steps of: accessing a server on a communications network via a network access device; transmitting data comprising an investor profile to the server; transmitting data relating to an investment objective; transmitting data relating to a proposed investment; and receiving a message relating to the suitability of the proposed investment based upon the investor profile and investment objective.