Risk Management in Asset Management: Trends and Developments

21. January 2019 | Drooms Global

The world’s economy is constantly shifting. Mega trends are altering the way in which we do business. All industries will be affected as regulatory, fiscal and political uncertainties redraw the world we live in, creating unprecedented challenges.


While current economic instability calls for short-term preparations, asset managers will face relentless investor and regulator scrutiny, putting risk management at the forefront of future practices.

The financial crisis in 2008, which plunged the world economy into a global recession, serves as a reminder of an economic upheaval to not repeat. While the collapse of large financial services and institutions was prevented, stock markets worldwide still dropped. Eleven years on and as the global economy recovers from the aforementioned crisis, a PwC report notes a shift and highlights how attitudes towards risk and asset management are evolving.

The financial industry’s primary focus hasn’t always been on risk management. But the situation is now changing – PwC’s report on the future of asset management highlights how regulatory, fiscal and political pressures are reshaping the asset management sector, putting “risk management, transparency and sustainability at the forefront”.

As the landscape of risk management continues to change, risk managers have found traditional models for calculating and evaluating risks to be insufficient. One of the current macro trends in the industry is establishing new frameworks and models. This assures practices keep up with the volatile and nimble landscape of asset management.

Current risk management models have to provide answers and solutions to varying issues. This includes:

  • Increased fragmentation
  • Complex regulatory frameworks
  • Changing client expectations

Risk managers are increasingly reliant on Big Data and advanced analytics. This can have a positive and negative impact on the sector. It opens the door to a more comprehensive assessment that can happen in real-time. Monitoring can make risk adjustment faster, as it’ll be easier to adjust the models in use.

However, the drawback is that Big Data increases complexity and is a strain on resources. It calls for better understanding and the right use of analytical tools.

Focusing on regulatory risk

Risk management is currently geared towards regulatory risk. Ever since EY’s survey on risk management in 2013, regulatory risk has been at the heart of how risk management is approached.

Looking at the regulatory market, it’s worth noting that it has been going through many changes at national and international level. The EU is taking a closer look at the financial sector, and there are plenty of developments in the pipeline that asset managers ought to keep an eye on.

On the other hand, even the relaxing of regulatory frameworks that may be on the horizon in countries like the US is something asset managers have to consider.

Looking to become more actionable

Asset managers are increasingly focusing on risk management and adopting risk measurement and risk reporting strategies. But on top of implementing these basic measures, there is an eagerness to make risk management more actionable. An article by Boston Consulting Group on risk management in the asset management industry, called for a comprehensive framework. It pointed out the work that’s currently being done, including the Global Association of Risk Professionals’ (GARP) work on “establishing a common language and a set of principles that provide a development path for firms”.

Asset managers are utilising tools such as:

  • Defining risk management processes and controls
  • Establishing good governance strategies
  • Appointing management committees

Furthermore, the industry understands technology’s role in risk and asset management. Technology can increase risk, but it also has the power to assist. Analytics and reporting platforms can have a comprehensive impact on the industry.

Responding to calls for improved transparency

The asset management industry is changing and a big driving force is a shift in consumer needs. There is a much bigger need for transparency, as consumers want to know what asset managers are doing and why. This is combined with the increasing thirst for sustainable investment opportunities.

Risk managers have to find a balance between enhanced transparency and protecting against information leaks. Reporting requirements need to be more sophisticated, which will require asset managers to emphasise operational efficiencies in the future.

Rethinking how risk management is handled

Risk management is not just about re-examining models. It’s also increasingly focused on the basic operational format. Due to the increasing complexities of risk management, many are considering outsourcing.

The decision to ‘make or buy’ is not driven by expertise alone but also resources. Funds are having to refigure their charges right now. According to an article by Forbes, “Customers have become more cost-conscious, sophisticated about investment strategies and willing to make more stringent comparison of products and services”.

Risk management is increasingly important but also costly, which means asset managers have to find a balance to juggle the transforming landscape.