On this week's episode of the Financial Planning Podcast, Yon Perullo explains that at its heart, working in risk is all about creativity.
Perullo is the CEO of
Before entering the world of fintech and financial services, Perullo was a professional musician with a background in chemistry. While Risk management and quantitative analytics later captured his heart, he believes that the lessons learned in those earlier, very different disciplines have moved him forward in his 15-year career.
He also believes that when it comes to risk, advisors are going to have to get more creative than just promoting diversification by asset allocation. RiXtrema has been focused on geopolitical issues impacting portfolios, as well as how the environment and new threats can rapidly alter the conversation.
Major events that impact market performance are nothing new. But Perullo and his team believe things are different today — so different that many of the concepts related to risk that financial advisors take for granted are no longer going to cut it.
During his conversation with FP Podcast host and lead editorial producer Justin L. Mack, Perullo talks about making the transition from touring guitar player to fintech CEO; events he believes could have a major market impact this year; and why having client conversations about risk in real time is a powerful tool for any advisor.
Listen to the new episode — as well as to all future and past episodes — by subscribing to the FP Podcast on
Transcript:
Justin L. Mack (00:02):
Good morning, good afternoon, and good evening. Welcome to the Financial Planning Podcast. I'm your host, Justin L. Mack, wealthtech editor with Financial Planning. And it is my pleasure to introduce this week's guest, Yon Perullo, CEO of RiXtrema. Yon, thank you so much for joining us on the show this week.
Yon Perullo (00:18):
Thanks for having me, Justin. I appreciate it.
Justin L. Mack (00:20):
Absolutely. Now, Yon is bringing years of experience to the show this week with a fintech career that began at FactSet Research Systems, where he was head of quantitative analytics. He also held several institutional asset management roles, including chief investment strategist for Tresalia Asset Management, a multi-billion dollar Mexico City-based family office, and chief risk officer for Fiduciary Research, an outsourced CIO overseeing $10 billion in defined benefit assets. He now leads the New York- based RiXtrema, a software solutions and provider and risk management firm. So, naturally we're going to talk about some risky business here on the FP Pod this week, and we've got the right guy to do it. And I hear RiXtrema is focused on the geopolitical issues that are impacting portfolios and why many of the tried and true concepts that financial advisors turned to in the past may not be the old bread and butter anymore. And we'll get into all of that and so much more this week with Yon. But the beginning is always my favorite place to start. So Yon, if you could for the listeners, give me a little bit about your path into the industry and how you got into fintech and asset management and risk in the first place.
Yon Perullo (01:22):
Well, I'll tell you, it was totally by accident. My major in college was chemistry, so I never thought that I was going to be doing anything in fintech or risk management.
Justin L. Mack (01:30):
That is a nice pivot. And I always love hearing about some of the pivots people have made into the industry, but this is the first time that I've had a chemist who is now talking to me about risk in financial services.
Yon Perullo (01:38):
Yeah, well even before that I was a professional musician. So I mean, that's what I did until I figured I wasn't going to make it. So I stumbled into a job at FactSet on their help desk actually, and quickly worked my way up the corporate ladder, so to speak. And then like many other people that start off in fintech, you kind of are talking to a lot of your clients. And you say, I can manage money, too. I can do that. And you leave and you go manage money for a bunch of years. And I did that for, I don't know, 15, 16 years or so. And then came back to RiXtrema, which was started by a colleague of mine at FactSet. So kind of closing the circle here. But yeah, I kind of stumbled into the risk management and the quantitative analytics side of the business and have loved it since. So it's been great.
Justin L. Mack (02:23):
Very cool. And first I have to go back even further and ask. As a professional musician, what was your deal? Did you play, did you sing, did you write, what did you do?
Yon Perullo (02:31):
All those things. I didn't sing that well. So I had two really good singers in our band and they kind of let me do it when there was group yelling, but my singing wasn't my strong point. I was the guitar player and we toured all over, mostly the eastern seaboard of the U.S. back in the '90s grunge days. So, yeah, it was cool. It was a great way to spend my twenties.
Justin L. Mack (02:52):
Very cool. And then into your other passion, again, studying chemistry. Interesting transition to make, but I don't know if anything that you learned when you were studying chemistry and doing that work has applied at all to the work you've done in fintech and financial services — whether it be something big or something small or something you look back and realize that foundation actually benefited you in the career you're in now.
Yon Perullo (03:13):
Well, I'll tell you, any science-based major I think is going to help you in a career in fintech. I mean, basically, just thinking critically. Math-oriented understanding. Hypothesis understanding. How to follow things through. Understanding how to research types of things I think helps you. I don't think it's necessary, per se. But I do think all those things help me in my career for sure.
Justin L. Mack (03:36):
Definitely can't hurt. And tell me a little bit about the work you are doing now. CEO of RiXtrema, focused on all the different things you're doing and providing solutions that support advisors at a time where they probably really need it. Give us a quick overview on what your day-to-day is and what your primary focus is at.
Yon Perullo (03:51):
Yeah, we actually do two things. We, one, which we're going to talk about mostly today and where our background is, which is the risk management side of things. We started off in institutional risk management, doing scenario analysis and really trying to understand how portfolios move in different markets and different market environments and different potential market environments. And the other thing that we do is, we have a product called Larkspur Executive, which is a tool on the qualified plan side. So helping advisors find plans that they can prospect and take over from a 401(k) perspective. And so those are the two things that we really do. But most of the work that I really have done and am more passionate about probably is the risk management research. It's just been what I've done for the last, I don't know, 15 or 20 years now.
Justin L. Mack (04:40):
What about that draws you to that aspect of it? Because it's something that we talk about a lot in our coverage here at FP, and I know for next year we're going to be locked in on that. When you talk about just the market environment and the outside things that are happening inside conversations with advisors and clients. Stuff that, like you said, we're going to spend some time talking about on the podcast. But risk. It's not always the most appealing thing to a lot of folks. It might be almost a four letter word that they don't wanna deal with when they're talking about their money. But why is it so important to you?
Yon Perullo (05:11):
Well, I mean it, it's something that really easily gets lost. I mean, I think your point, Justin, think about the last 10 years before. Twenty years even, going back before 2020. I mean, markets were kind of going in one direction. And even in 2020, when you saw that quick dip following the COVID lockdowns that came, things came roaring back. If you didn't tell people that they'd lost money, they probably never even noticed that they'd had a drawdown. And so risk was not something that was top of people's minds. And even going back to 2015 and 2016 when you had these really low interest rates, there was always a risk of something happening. It's happened today where you have rising rates and falling equities at the same times which historically hasn't happened. So risk, especially when you're managing bigger portfolios, when it's not just a return story (and) when you're not just really chasing returns, I think risk is really something that you have to look out for when you can't afford the drawdown. You need even more focus on risk than maybe somebody that is all in on making as much as they can off their portfolio.
Justin L. Mack (06:17):
Definitely. And you talk about how different that was then and now just in the last couple of years. I think the understanding or the idea of the conversation around risk obviously has changed for folks in the profession, but even for clients or individual investors. Millions of people are picking up their favorite electronic device and trying to do something on their own. And trying to become mini experts in what they need to understand about that. They understand that risk is very much a top-three concern outside of just, what I want to put in and what I hope to get out. I think we all kind of get it by just, well, opening your eyes and looking around. <laughs> So with that, tell me why, some of the old ways of doing it as far as allocating things to mitigate risk just won't work today in 2022 going into 2023. What's different now and why don't those tried and true policies or applications work anymore?
Yon Perullo (07:11):
Well, I think it's actually going back even a lot further than just the last year. I think the lessons that people can learn from other crises too can be applied. But now the difference is we have a lot more computing power and a lot more tools. You look at some of the things that have been developed. Everything from, you know, go all the way back to the '50s, when you think about Harry Markowitz looking at his efficient frontier. And mean-variance optimizations and things like that. You move that way forward to now, and we can do things like scenario testing and we can have much bigger sets of data that allow us to explore these things in a lot greater detail. And so using those kinds of simplistic statistics, something like simply volatility, which was very much used back … I mean, it's still used today. Volatility is still a valid statistic, but it's not the whole story. You have to think about the relationships of all these different variables to each other and how each crisis, those relationships can change correlations through time. You can just look at any period that you want to and compared to another period, it's not exactly the same. They're not completely stable.
Justin L. Mack (08:18):
Looking at just right now, the other thing that's interesting is I think depending on who you are, if you were to ask someone what the current crisis is, you might get a bunch of different answers based on where you're from and what your interests are. When you say what was the biggest thing in 2022 that affected you personally or financially or from a business standpoint, you can pick and choose. I don't know if that's a good thing or a bad thing. But your thoughts on just the kind of volatility we've witnessed in 2022. Not just the big swings. But the various kinds of inputs we're getting as far as things that are stressing us out a little bit.
Yon Perullo (08:55):
And I mean this is one of the first times we've had inflation to go along with the crisis. I mean, inflation is a big one, because that really affects everyone … but especially when you're on more of a fixed income, if you will. I mean, not fixed income, the asset, but a fixed income as far as your ability to spend. And when you, you know, really notice these 10% increases in your food or in your gasoline, which was up even more… And then the wild swings, you really notice that, because you don't have a lot of money to play with. Whereas if you're a little more agnostic to the price of goods, you're not noticing that so much. So different people can really be picking up on the inflation story. We also have, I talked about a moment ago, we started from a period of very, very low interest rates where the 10-year bond was at 50 basis points.
(09:51)
Meaning that if I invest in a bond with the U.S. government for 10 years, I'm going to get 50 basis points or 0.5% back on my money every single year. That's not a lot. That doesn't keep up with anything. And so now, the 10-year is much higher. When that happens, you have falling bond prices, which a lot of people will see directly in their portfolio. So even though there might be a positive from all that, people are getting hurt in their retirement portfolios when they think that they're doing diversification between stocks and bonds. When you have rates rising and stocks falling, you're getting hit on both sides of that. And year-to-date, we've kind of seen, if you just look at a generic S&P index and a generic Barclays aggregate index, those are down roughly the same amount year-to-date. So your diversification didn't work the way that you would expect it to in a 60-40 portfolio.
Justin L. Mack (10:44):
And how difficult is it to, once you realize that, okay, this wasn't the way to go. We've got to adjust. How difficult is that and what are some of the things that people should be focusing on? Or, what's the better way to go about that? We know the 60-40. We've talked about that on this platform and many others. You can't just go to that, set it and forget it. <laughs> What's the better, I guess, more logical way to look at it now while also accounting for all the different things we need to account for? Any tips or thoughts there?
Yon Perullo (11:11):
We talked a little bit about volatility a moment ago, and we ran something a few months ago where I showed three different portfolios. All three were 60-40, all three had the S&P 500 as your equity investment, but I varied the 40% between different types of fixed income assets. And we would look at different scenarios. And so these things would have roughly the same volatility, but drastically different scenario outcomes. So everything from your duration. What is the duration of your fixed income portfolio, longer being more volatile and more sensitive to interest rates versus shorter being less volatile and sensitive to interest rates. That makeup can really matter whether you're in corporate versus government, munis, whatever it might be. You can really vary that. So that's why I think scenario analysis is so important because we're talking 60-40 in a very generic way. But when you get into specifics, you can get very different reactions from those in different market environments. So again, it's hard because whenever you're doing some sort of risk management, you're trying to predict the future in one way, but in some sense this wasn't a hard one to predict because you had rates so low.
Justin L. Mack (12:30):
Fantastic. And with that, we're going to take a quick break and enjoy a quick word from our sponsors, but when we return in the second half, we'll have more with Yon Perullo, CEO of RiXtrema. We're talking risk, the wild world around us and some FP Podcast good vibes. Stay locked. We'll be right back after this break.
And welcome back to the Financial Planning podcast. I'm your host Justin Mack, and we're diving back into our conversation this week with our guest Yon Perullo, CEO of RiXtrema. Now Yon, going into the break, we talked a little bit about how you entered into the business, why risk is so exciting and important for not just you, but anyone who's working in the business now. This is something we all need to have our heads on a swivel for. So I want to go a little bit bigger, talking about those geopolitical issues that you guys have been taking a look at all this year and what's kind of, I guess coming in 2023.
(13:20)
Before the break, we joked that (understanding) risk is sometimes like having to look in the crystal ball and predict as best you can. Not an easy thing to do. I think this year is a good example of being unable to predict the future. And I think this timing is interesting because as we know, this is the time of year where people kind of want that fresh start. A fresh approach. A way to kind of Etch-A-Sketch some of the mistakes they've made over the past 12 months. For you, what are some of the big world issues that we need to take a look at because they are going to come back and affect our portfolios and affect our pockets at the end of the day?
Yon Perullo (13:54):
Yeah, I mean it's a great question and as you mentioned, it's really impossible to know exactly not just what's going to happen, but exactly how markets are going to react. And so it really is a matter of looking at the scenarios in detail because what this can do, even if you get the exact movement of the assets wrong, it can help you understand how your portfolio performs in different market environments. So one of the things that we've been talking about and we've been talking about it for a while, and I have no idea if this will happen in 2023 ... My gut instinct says it will not. But we talk about China and Taiwan. And we saw Russia invade Ukraine and there was a market move because of that. There was some stress because of that. There was oil price stress because of that. There was, for a while, wheat price stress because of that because these are the big commodities in those regions.
(14:43)
So by looking at what is affected by those two having that conflict, you can get a sense for what might happen down the road. Same thing with a China-Taiwan type of scenario. Now this one would be very different, because arguably we couldn't put the same types of embargoes on China that we were able to in Russia because China is a much different economy than Russia. One of the things that we adjusted is we put these sanctions on semiconductors. So the really advanced semiconductors, companies aren't really allowed to sell those to China at this point. One of the biggest producers? Taiwan Semiconductor, making it a bigger draw for China to try to do this now, and that would essentially get them some of the most advanced manufacturing capabilities in the world. So what can that look like? So going through exercises like that, even if you don't think that's going to happen in 2023, I think is a really good idea because even though it might be out there as a very left-tail event as we call it, or a black swan, understanding what that can look like I think is very important.
Justin L. Mack (15:51):
And to follow up on that too, is there anything to be gained by … and like you mentioned, even if it doesn't happen, do you think maybe these are situations where you might solve for some other problems along the way? Looking at this almost worst case, almost, you know, hope it doesn't happen. If it does, we need to be ready by doing X, Y and Z. And maybe Y and Z are things that you end up using after all. Is that something you've experienced when planning for the worst, you get some of the best?
Yon Perullo (16:14):
Definitely. I mean, absolutely. So look, if we just stay on the China thing, and I can even give you an example of this. So let's say that you think this is a very low probability event that it can happen. And what you see is that obviously the place that would be impacted the most is probably China. So if we do put an embargo on there, if there is a big, and who knows how militarily involved the U.S. would be or anything like that. But if there is a big conflict around China, China is likely to be the hardest hit market. So what does your direct Chinese exposure look like and how much does that help you in your upside? Because you can't just look at risk as a street. You have to look at the positives too that can happen. What if the U.S. market rallies?
(16:56)
What if the Chinese market rallies? What if this event doesn't happen? How much does that stand to benefit you versus how much do you stand to get hurt? And that's the classic risk-return trade off. So understanding these variables and how they work, you might say, well I don't think this is really going to happen. But that China exposure isn't doing enough for me on the upside that I really want to take that risk. And these exposures aren't isolated. A risk in China is going to manifest itself in the U.S. All these things are intertwined, but maybe you can mitigate some of that
Justin L. Mack (17:26):
And definitely picking out those benefits of risk is also very important. Again, it's always focused on, well this is what could happen in a negative context. But there are things that can be beneficial in keeping an eye on that are extremely important as well. Something I wanna pivot into as well is when we talk about these bigger issues — about what might be happening between China and Taiwan like we saw with Russia and Ukraine — is the impact it has not only on the markets from a performance standpoint, but the markets as far as the investors and the clients who are going to be working with advisors. They're paying attention, too. They have now experienced some of what we've experienced in 2022. So say something like that happens next year. They've seen a little bit. They've probably felt a lot. They're probably going to have a different mindset and a different set of questions for their advisors, and advisors will be having different questions for folks like yourself who are trying to help them out with this. Tell me a little bit about, I guess, that investor psychology part of risk and geopolitical risk as it were. I have a scientist here, which I'm very glad to have this conversation with, but what does it do to us as far as our ability to put money into the market and take that risk? Is it changing or are we still ready to go all in despite all we've seen?
Yon Perullo (18:32):
I don't know if we're ready to go all in. I mean there's this great … and I've used this a million times, so anybody that's heard me talk before has probably heard me use this quote. But I love it. The Mike Tyson quote that says, "Everybody has a plan till they get punched in the mouth." And it's true with risk as well as anything else. And so I think one of the things examining these scenarios does, and it's not just one up and one down like we're talking about here. That's very simplistic. You have to look at a whole continuum. But the more the client understands the win-loss scenarios in their portfolio, the more comfortable they're going to be with something like this. So if you're having conversations, you wouldn't have gotten the Ukraine thing. Nobody really saw that coming. You probably wouldn't have predicted COVID, right?
(19:20)
That wasn't really coming. But if you were looking at up-and-down scenarios in your portfolio saying that this is what we can see you losing, and I draw a major difference between these scenarios and a VaR saying 95% of the chance you're not going to lose more than X. Saying that these are the types of things that can really hurt us in our portfolio and these are the kinds of things that are really going to help us. I think it's a great conversation to have with clients and it gives them comfort that you're looking at these geopolitical things. And once things start to happen, you can insert one of those scenarios and talk to them about it. Get them comfortable with where they are. Get them comfortable with what you might have done to mitigate some of that downside and say it's coming at a bit of a cost on the upside, but let's just wait to see until we're through this.
Justin L. Mack (20:07):
Definitely. And any advice for advisors who are understanding this as well? They're getting ready for the new year and just wanna make sure that they're in a position to be the best that they can be for their clients, for their business. Whether it be on an actual decision-making side as far as where we're allocating some assets or just from the ability to answer some tough questions clients are coming to them with. Questions about these kinds of things. Advisors who want to get better at understanding risk and how to work with their clients through it, what should they be doing? Any advice for them as they get ready for the new year?
Yon Perullo (20:38):
Yeah, I mean I think that really because risk has been a sort of a back-burner issue we've talked about for many advisors, or maybe it's down to a number. This is your volatility or this is your VaR. I think making this a regular part of your discussion, and I don't say that selfishly; there's other people that kind of do what we do. I mean, I think it's really important that advisors expand their risk vocabulary. Expand that framework around the consequences in their client portfolios so they can have those conversations. And if you have a tool like ours, and there are others, so I'm not just selling our tool … you can actually do this live with clients where a client would say, "Well what if what's going to happen to me if markets dropped 20% and rates don't rise like they have? What if rates start to come down?" Well, you can do this live in the application and show what the impact is on their portfolio. And it's a pretty powerful thing to have a discussion like that with your clients. I've done that before as an allocator with clients that we'd allocated money to and sat down with them and said, how do you see yourself making money here? A little bit of different conversation, but able to move those levers around to get to have a really robust discussion around risk and return
Justin L. Mack (21:56):
Definitely. And a valuable tool in the arsenal of an advisor. Again, competition is fierce. Everyone is marketing to your clients all the time because everyone's online. So if anything you can do to separate and, like you said, have those tough conversations that leads to stronger bonds potentially is not a bad thing to do. So brush up on the risk knowledge in 2023. Cause I'm sure something's going to happen if the last few years are any indication. I don't wanna jinx anyone on this podcast. I'll knock on what I have nearby. But come on, we know what this is now. We've been around here a couple of years.
So before we wrap up, one thing I always like to do, and it has become customary here on the Financial Planning Podcast, I like to end with some good vibes. And we talked about your career, how it's changed, started with FactSet and kind of come back to FactSet in a way as you now lead RiXtrema with things coming kind of full circle. And the 15 years of working in risk and how that is so exciting for you. What's your favorite thing about your job? What do you love most about the work you do considering that you often probably spend your day looking at some of the stuff that people don't want to pay too much attention to? What do you love so much about the work you're doing?
Yon Perullo (22:59):
Well, I mean, the good news for me is all that stuff that we just talked about that people don't like to pay attention to is what I really enjoy. I mean, I enjoy this side of our business, I would say more than the qualified plan side of the business. Not that that's not interesting in helping people market and things like that, but really trying to think about different ways that markets and events can impact your portfolio is something that I really enjoy about this job. I enjoy helping clients understand that. I mean, hopefully you can hear it in my voice, but this is something I enjoy talking to you about. This is something that it's, there's no one right answer. So if you came back to me and said, I had a scenario with you, well, you could say I don't see it happening like that. Okay Justin, how do you see it happening? Let's talk about that. And there's no one right answer, especially before something happens. And that's why you've taken all these different kinds of viewpoints. So just to give a quick example, before the 2020 election, we had Trump wins bull-case and bear-case scenarios. We had Biden wins bull-case and bear- case scenarios. And those were different scenarios. And it's about, can you think about two sides of the same coin having different outcomes? And so I find that really rewarding and fun.
Justin L. Mack (24:09):
Absolutely. I can see that. And you can definitely feel it when you talk. You can feel it, you can hear it. It's palpable. And that ability, it sounds like, to do something that's really focused on the business as it were, but also allows for some really wide-ranging thinking and creativity is probably pretty cool. So not a bad way to spend the day, it sounds like.
Yon Perullo (24:26):
That's right. Yeah. Thank you. Exactly right.
Justin L. Mack (24:28):
Absolutely. Well, I want to thank you again for joining us this week on the Financial Planning Podcast and enjoy looking at all that risk and risky stuff in 2023.
Yon Perullo (24:37):
Thank you, Justin. I appreciate being here. It was fun.
Justin L. Mack (24:39):
Definitely. And I want to thank everyone for listening to the Financial Planning Podcast. This episode was produced by Arizent with audio production by Kevin Parise. Thanks again to our guest, Yon Perullo, CEO of RiXtrema. Rate us, review us and subscribe to all of our content at