Managing risk for advisory firms can be a tricky business. Many advisory firms are small enough and different enough from the mega-sized banking, insurance, brokerage or other financial services firms that a lot of the research or traditional “wisdom” about managing risk just doesn’t apply–it’s focused on the behemoths. So when an entity comes up with risk-management research focused squarely on advisory firms, we pay attention.
While many smaller firms focus most sharply on portfolio and market risks–for good reasons–there are other threats wealth managers need to be aware of and control. SEI Advisor Network, based in Oaks, Pennsylvania, has released a white paper, “The Risk Dynamic,” about the specific risks advisory firms face and the tactics advisors can employ to mitigate them. The paper identifies five types of risks for advisory firms: infrastructure, organizational, fiduciary, reputation and client. “The five risks are not a surprise…the different economic climate makes these risks more important,” to wealth managers, according to SEI’s Head of Advisor Solutions, Kevin Crowe. He notes that advisors request time and again that SEI, “tell us what we can do about it.”
Fiduciary risk is clearly at the forefront of advisory firms’ thinking when it comes to risk, especially with legislation proposed that could change the regulatory landscape for both RIA firms and broker/dealers whose reps give advice. While RIAs have been bound by fiduciary duty since the Investment Advisers Act of 1940, there is pending legislation that would mandate that B/D reps who provide advice to clients act as fiduciaries toward their clients. If they must have the same fiduciary duty to clients as investment advisors have, B/D reps and executives will have to find the path to the fiduciary standard–and it’s vastly different from the suitability standard they currently operate under.
“Take the investment process–there’s clearly a proliferation of products an advisor can use. Can they have expertise in all of them and apply a consistent process to evaluating them and implementing them at an investor level? That seems like a difficult task,” Crowe asserts. One way advisory firms can mitigate some of this kind of risk is to partner with a firm than can help with that. But, he cautions, “you have to be careful who your partners are–you still have fiduciary responsibility to choose that wisely.”