Financial firms understand the importance of having a robust and reliable risk management system. Regardless of the size of your clientele, any business that deals with trading, securities and investments has to be aware of the regulatory risks involved. As a result, risk management has become a hot topic both on the industry and federal government level.
For firms looking to enhance (or build from scratch) their risk management efforts, there are three key requirements to keep in mind. Having platforms, people, and processes that identify, remediate, and document risk is essential to the success of wealth management firms in 2022. Without these core characteristics, it’s likely your risk management solution will not stand the test of time.
Consistent and Accurate Identification of Risk
The first key requirement all risk management systems need to have is the ability to consistently and accurately identify risk. An automated data aggregation tool that allows for the scoring and flagging of potential risks is an ideal – and increasingly necessary – investment for firms to seriously consider.
The first piece to this identification process is leaning into a platform that can pull from disparate data sources and visualize findings into a single-view dashboard. Seeing patterns, or otherwise consistent, problematic behavior within trade activity, allows for better threat identification and less wasted time spent chasing false alarms. PWC reported a savings of 160,000 hours through automation of its central services functions in 2019. This achievement not only decreased the manual time employees needed to spend on identifying and evaluating risks, but also expedited the entire process to catch problems before they became too difficult to easily resolve.
Earlier this year, Robert McGill, President, Compliance and Compensation Platforms at Docupace, hosted a webinar focused on topics related to risk management. In this presentation, he particularly focused on the plethora of “false positive” alerts that risk management software generates on a daily basis. Recent reports have identified relationship managers spending up to 60% to 70% of their time on non-revenue generating activities. Unsurprisingly, these alerts cause unnecessary distraction and false lead chasing for back office employees.
McGill argued for the adoption of smart programs that offer a customized solution for categorizing alerts and notifying the right people of appropriate risk levels. Docupace particularly excels at this nuanced handling of threat alerts with its 45 different types that firms can adjust as needed. Having this level of flexibility built into the system allows advisors and investors to quickly adapt and focus resources on the items that need attention rather than dealing with thousands of false alarms.
Similarly, new artificial intelligence technology continues to improve what’s possible when it comes to risk management software. Some programs can better predict future risk through analyzing behavioral patterns. Text and voice analysis better captures conversations with clients into a holistic view of the entire trade exchange. More visibility into every interaction that encompasses a financial transaction provides firms with a better way of determining (and later remediating) risks.
Making Remediation a Priority
The second key piece of risk management is remediation. Remediation refers to the actions taken by RMs (risk managers) and wealth management firms after a threat has been identified. This part of the risk management process typically includes an in-depth follow-up into the risk by a firm representative, extensive documentation, and backfill of available client data.
Perhaps unsurprisingly, many organizations prefer to outsource their remediation operations. In a 2020 survey, over 60% of firms reported a willingness to outsource services that related to operational efficiency. For some companies, investment in an automated technological platform may make the most sense. While still retaining control over sensitive client information and internal processes, software systems like the one Docupace offers better organize and prioritize remediation steps that RMs need to take when dealing with threats. A simplified way of entering notes and tracking complex investigations results in faster and more accurate resolutions, which can save organizations undue time and stress.
Another important component of risk management remediation is developing an extensive governance system to which all employees adhere. EY recently documented its experience developing an ethical employee culture and established processes for dealing with risky behavior. Both front and back-office workers need to view compliance and risk management as a necessity for the smooth operation of business. It’s not good enough to simply “check off the box” when it comes to ensuring safe and transparent trading activity. Instead, employees need to belong to an integrated workflow that has clearly defined roles and practices meant to better manage risk.
Building a Risk Documentation Process
Finally, healthy risk management systems always include a documentation requirement. Federal government regulations and internal procedures often require firms to include documentation of every incident related to risk management. In the pre-digital age, this process very quickly became unwieldy. Mountains of physical paperwork and rows of filing cabinets often defined the work life of financial advisors and risk management specialists. However, new technology has greatly simplified and sped up the risk mediation process regarding trading threats.
Docupace understands the importance of investing in a digital system that organizes and stores documentation. In fact, investing in systems like a DMS (document management system) that store customer data and corresponding documentation can actually be a leading way to attract and retain new talent. Financial advisors excel at client interactions and should avoid work that takes them away from building those relationships and making trades. Solutions like Docupace allow this to happen in a consistent and reliable way.
Ultimately, risk management is a complex subject and one that requires constant organizational adaptation. The more flexible and resilient a firm’s risk management process is, the better it can identify and react to threats that could otherwise result in costs to finance and manpower. Understanding the importance of all three requirements of a risk management system – identification, remediation, and documentation – is not something that companies should take lightly. Building a robust technological solution to this complex and labor-intensive process is what Docupace set out to do – and we strongly encourage all our existing and future clients to continue researching and investing in this key area of business operations.
