St. James Ballroom
Is Value at Risk a Suitable Tool for Financial Professionals and Their Clients? (303876)
*Michael William Kotarinos, University of South Florida, Solarbeam Capital LLC
Chris P. Tsokos, University of South Florida
Keywords: Value at Risk, Suitability, Risk Management, Financial Planning, Client Relations
Value at Risk (VaR) is a commonly used financial measure that assigns a level of confidence associated with a given maximum loss of a portfolio over a period of time. VaR was built out of the need to communicate in an efficient and effective way to clients the level of the tail risk in a basket of assets in a way that does not require complex mathematical techniques. Because the tail is simplified into a simple number, it has been argued that this allows financial professionals and advisers a way to explain complex concepts in a simple, easy to understand manner.
While simplification and communication with clients is important, it is not without its issues. For all its benefits VaR has many flaws. These can be grouped into four broad categories: violation of fiduciary duty and conflict of interest, difficulties in the computation and expression of VaR, errors in the assumptions generating VaR estimates, and difficulty in conveying the nature of the VaR estimate to a client. This poster introduces the concept of VaR, discusses the issues associated with the measure as a tool for client risk management, and concludes with some suggestions for financial professionals and consultants.