Facing disruption: The evolution of the risk function in the asset management industry
23 October 2019
The asset management industry is going through a period of unprecedented change. Across the sector, competition, client demands and changing regulatory expectations are putting asset managers’ margins under severe pressure, forcing firms to review their strategy and related business model. As the industry strives to adapt and searches for new opportunities, we believe few firms have fully considered how their risk function will need to adapt to best support the business in achieving its strategic objectives.
Our observation – based on our client discussions and through data collected by surveying Chief Risk Officers across leading UK asset managers – is that there are a number of challenges facing the risk function in meetings its objectives, including the following:
- Lack of maturity of first-line controls
- Deficiencies in management information
- Embedding and measuring appropriate culture in the firm
- Technology infrastructure is comprised of multiple legacy systems and disparate data sets Skills gaps are evident in data, technology and change management.
Going forward, the risk function will need to maintain the confidence it has already built up over the years, while simultaneously addressing its existing challenges and supporting the organisation in navigating emerging risks. However, firms are constrained by cost pressures and lack the internal capacity to support the changes required. So asset management risk functions will need to prioritise their efforts, seek savings to fund the transformation journey and remain agile to address new requirements as they arise. Planning for the journey should not be undertaken in isolation, and opportunities to link in with other initiatives across the organisation should be identified and realised.
Before embarking on the transformation journey, AM firms need to consider four key questions
- What is the firm’s strategy – and how does the risk function help deliver on it?
- Where is the risk function in terms of maturity in progressing towards where firm aspires to be – and what gaps need to be bridged?
- What levers can be pulled and what actions should be taken to bridge the gap between where the risk function is today and where it wants it to be?
- What are the firm’s priorities and what does the journey look like?
It is imperative that the answer to the first question – which lays the foundation for the transformation journey – is approved by the board, since it is the board that retains ultimate accountability for the effectiveness of the organisation’s risk management arrangements. We begin to explore the remaining questions in our white paper ‘Facing disruption: The evolution of the risk function’, by:
- Proposing six key operating model dimensions that asset management firms can use to assess their risk function;
- Presenting our observations of the current state of the risk function and our point of view on its future. Asset managers should reflect on these observations, identify which, if any, resonates with them, and how far along the continuum from their current state they wish to progress enabling them to identify gaps to close; and
- Identifying several levers that firms should consider to effect change. A cost-benefit analysis will help firms to determine the optimal mix of levers to utilise.
The overall outcome will be to transform the way the risk function operates, which will be absolutely critical to the future survival and success of AM firms