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In the past, the practice of proper risk management that goes beyond assessing and reporting risks, and also comprises the prudent management and governance thereof, was primarily limited to a selected number of big banks. Ten years ago, the 2008 financial crisis changed people’s perceptions and attitudes about the remoteness of potential risks and the necessity of being prepared for them. This change in perception led market participants in the financial sector as well as regulatory authorities and legislators to focus seriously on risk and prudent risk management. The resulting rules and regulations have since become our reality and no market participant can insulate itself against it.

If you don’t invest in risk, it doesn’t matter what business you’re in, it’s a risky business.

Gary David Cohn

Proper risk management is becoming more important to investors

Client expectations have changed and they want the additional peace of mind that comes from knowing their investments have been carefully selected, and that any potential risks have been considered. They now also have readier access to information and new points of reference, which enable them to be more sophisticated in their review and questioning of the performance achieved. A sound investment management risk framework makes it possible to take a proactive approach to the prevention of disproportionate losses in client investment portfolios and thereby contributes to long-term performance and client retention.

The different faces of risk

But investment risk is by no means the only risk asset managers are facing. Increasing regulatory requirements and enforcement trends may have an even greater impact on the business, and necessitate an in-depth analysis of the effects of the new rules, taking into account not only the jurisdiction of the asset manager, but also the client’s legal environment in the case of cross-border services. Because of the cost of the ongoing analysis of regulatory changes, asset managers are beginning to consider limiting their service offering to certain focus markets, and consolidation is becoming more probable and economically attractive.

The rapid technological developments that are currently underway open up a range of new possibilities and opportunities for asset managers that allow for faster and more efficient communication and scalability. However, a well-considered application of these technologies also requires a careful assessment of the potential vulnerability of such technological means in order to protect the asset manager and its clients against data losses and leakage, as well as the risk of misuse of the data for criminal purposes.

Implementing a corporate risk culture

Against the background of these developments, it is no longer appropriate to delegate risk management to a specific risk manager or compliance officer.

Instead, it is becoming vital that a corporate risk culture be developed and supported by all employees throughout the organisation and that this culture be embodied and applied consistently. Identifying potential risks and carefully assessing their possible impact, as well as prudent measures that could help to mitigate such risks, are becoming more essential in today’s world. A company’s risk management structure should therefore include an ongoing effort to assess and analyse the potential areas of future risk. One aspect of this is understanding the risks inherent in the company’s business model and the potential impact that future developments could have on the company’s profitability as well as its ability to create sustainable value.

About the author

Nicole Bohn works at Julius Baer as General Counsel Private Banking & Chief Risk Officer Intermediaries & Global Custody

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