--- title: Find out how your practice would fare in the next down market description: Is your practice at risk? Here’s a quick way to estimate the sensitivity of your practice to markets. image: https://www.covisum.com/hubfs/8465_WEB_Covisum_blog-graphics-risk.jpg --- [Login](https://www.covisum.com/login-experience) | [Call: 402-235-4500](tel:1-402-235-4500) | [Contact Us](https://www.covisum.com/contact) ** [![covisum-logo](https://www.covisum.com/hs-fs/hubfs/covisum-logo.png?width=264&height=41&name=covisum-logo.png "covisum-logo")](https://www.covisum.com/) [![Start Your Free Trial](https://no-cache.hubspot.com/cta/default/2755909/b23743cd-d0df-4907-a66d-293b58ab1164.png)](https://cta-redirect.hubspot.com/cta/redirect/2755909/b23743cd-d0df-4907-a66d-293b58ab1164) [![Contact Us](https://no-cache.hubspot.com/cta/default/2755909/6c6d7fe7-e094-4fc0-9c82-d93d4ccbb532.png)](https://cta-redirect.hubspot.com/cta/redirect/2755909/6c6d7fe7-e094-4fc0-9c82-d93d4ccbb532) # Find out how your practice would fare in the next down market [IN THE NEWS  |  ](https://www.covisum.com/blog/topic/in-the-news)10/31/17 1:35 PM  |  by [Ron Piccinini, PhD](https://www.covisum.com/blog/author/ron-piccinini-phd) By, [Ron Piccinini, PhD](https://www.covisum.com/our-team/#ron), Director of Product Development ![8465_WEB_Covisum_blog-graphics-risk.jpg](https://www.covisum.com/hs-fs/hubfs/8465_WEB_Covisum_blog-graphics-risk.jpg?width=320&name=8465_WEB_Covisum_blog-graphics-risk.jpg) From a risk manager’s perspective, a bank is a derivative on interest rates. Similarly, RIA practices can be viewed as a derivative on stock and bond markets. Here’s a quick way to estimate the sensitivity of your practice to markets. 1. Start with your firm's AUM. We'll use $200 million for our example. 2. Segment your book of business into different buckets based on your breakpoints in fees. Here's what we'll use for our example: - Bucket 1 has $25 million generating $250,000 per year (1.00% AUM fee) - Bucket 2 has $55 million generating $495,000 per year (0.90% AUM fee) - Bucket 3 has $75 million generating $555,000 per year (0.74% AUM fee) - Bucket 4 has $45 million generating $270,000 per year (0.60% AUM fee) 3. Gather the information about your model portfolios. Our example firm uses the following three models: - Aggressive portfolio (80% SPY and 20% SHY) - Moderate portfolio (60% SPY and 40% SHY) - Conservative portfolio (10% SPY and 90% SHY) For simplicity, let's assume that: - AUM buckets 1 and 2 are comprised of 25% Aggressive, 50% Moderate, and 25% Conservative portfolios - AUM buckets 3 and 4 are comprised 50% Aggressive, 30% Moderate, and 20% Conservative portfolios ### Now the big question: what is the market risk to revenues of this firm? If nothing changes, our example firm is expected to generate $1,570,000 in fees per year. In order to figure out how much is at risk, first, we need to estimate the risk of each portfolio. This is easily done with [SmartRisk](https://www.covisum.com/smartrisk) software. Just input your firm as if it were a client and input the firm's AUM buckets as if they are your "client's" portfolio.  | **Portfolio** | **Quarterly Risk** | **Yearly Risk** | | --- | --- | --- | | Aggressive | -21% | -35% | | Moderate | -15% | -28% | | Conservative | -2% | -4% | | **Bucket 1 & 2 Risk** **(25% Aggressive + 50% Moderate + 25% Conservative)** | **-13%** | **-26%** | | **Bucket 3 & 4 Risk** **(50% Aggressive + 30% Moderate + 20% Conservative)** | **-15%** | **-28%** |   In our example, in a bad quarter, AUM buckets 1 & 2 could drop 13% in value. In a bad year, they each could lose 26% of their value.  Our example firm’s revenue after a bad year would look as follows: - Bucket 1 has $18.5 million generating $185,000 per year (1.00% AUM fee) - Bucket 2 has $40.7 million generating $366,000 per year (0.90% AUM fee) - Bucket 3 has $54 million generating $400,000 per year (0.74% AUM fee) - Bucket 4 has $32.4 million generating $194,000 per year (0.60% AUM fee) This adds up to revenues of $1,145,300 after a bad market year, compared to $1,570,000 if nothing changed: ***The firm has a risk to revenue of 27.05% due to market exposure.*** Is your firm’s revenue risk tied to market exposure? Find out with a free trial of SmartRisk. [![Get a 10-day free trial](https://no-cache.hubspot.com/cta/default/2755909/f1ebd8a4-92f8-43b7-a832-684eb8d2a8c4.png)](https://cta-redirect.hubspot.com/cta/redirect/2755909/f1ebd8a4-92f8-43b7-a832-684eb8d2a8c4) Already taken a trial? 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