A new white paper looks at the growing significance of "enterprise risk management" - one of the most talked about and complex area of the wealth management sector today.

Wealth management firms can improve their enterprise risk management practices - one of the most talked about and complex areas in the sector today - by outsourcing their various technology systems to a single provider, SEI said in a new white paper. 

The firm highlights in Risk Management—A Strategy for Success that many wealth management firms operate on up to 50 legacy systems with various data
sources and, crucially, limited integration between them. But when information is housed in a single location, firms can better report on and
analyze business trends throughout the organization, it said.

Enterprise risk management, or ERM, relates
to the processes used by firms to identify and address the various risks they
face. Essentially, ERM provides a “mechanism” for identifying which risks
represent opportunities and which may lead to potential pitfalls, according to
PricewaterhouseCoopers. SEI believes that outsourcing
is just one avenue wealth management firms should consider when looking to
enhance their ERM practices.

Al Chiaradonna, senior vice president, SEI Wealth
Platform, told Family Wealth Report
that the biggest risk pressures facing the wealth
management industry today boil down to two things: operational
risk and reputational risk.   

“Investors and
regulators have much higher expectations of wealth management providers than
ever before when it comes to the quality of their infrastructures and the
transparency they provide around their operations. There is a demand for
institutional-quality in the retail space and if there is a breakdown or a
perceived breakdown in infrastructure or processes it can be devastating to a
provider,” Chiaradonna said.

But crucially,
it is when trying to navigate between disparate pieces of technology that
regulatory and compliance issues arise. As
SEI stated in the paper: “Risk is often equated with regulatory reform;
complying with legislation such as Dodd-Frank, the Bank Secrecy Act and the
Anti-Money Laundering Act is a constant challenge to wealth management firms.”

Considerations

The firm acknowledged
that, given the sensitive nature of wealth management, outsourcing is not a
decision that “should be made lightly.” Indeed, there continues to be debate
about what is the most efficient approach wealth management firms should take
in handling issues related to technology upgrades and replacements,
particularly when sensitive client data is at stake. 

On the other hand, the
issue is important at a time when regulators, for example, increasingly expect
management teams to prove that they are “fully aware of their total exposure,” SEI
said. And it’s not just regulators; shareholders, employees and clients – for
varying reasons – are also demanding it, the firm added.

“The financial
crisis of 2008 created a seismic shift in the industry among regulators, among
investors, among providers for that matter. Risk mitigation has become so
prevalent that in many cases it trumps performance,” Chiaradonna told this publication. “It’s
become a major factor, and in some cases the primary factor, in evaluating
investment managers and wealth management providers in general.”

SEI believes that a single
platform leads to better management information. On a unified
platform, for example, chief executives, chief operating officers, risk and compliance
officers, and chief investment officers, etc, can better asses how their
business is operating and how exposed it might be, the firm said.

Another point relates to
the costs associated with implementing and maintaining a more advanced risk
management practice. However, SEI believes that this additional expense can really boost
long-term business growth.

Making the move

SEI emphasized that due
diligence is “critical” before making the move to partner with an outsourcing
provider.

“A firm should explore the
potential outsourcer’s ERM governance, which should include extensive programs
around disaster recovery and business continuity, information security, and
third-party vendor management practices,” it said.

Meanwhile, Chiaradonna, added: “you look at track record.”

He explained: “It’s not just where someone is today but whether
or not they demonstrated an ability to innovate and be a leader over the long
haul. That means they continually invest in technology, in talent and all the
other resources it takes to be ahead of the curve. And one thing I’ve learned
over so many years is that culture counts. It not only about technology or
processes, it’s about feeling a synergy with the people you’re going to working
with as a partner.”

On a final note: While SEI believes that, by outsourcing to a single provider, risk
is reduced, it could also be argued that relying on a single relationship is riskier
than diversification due to the “eggs in one basket”
notion.

“The reality is a single provider eliminates confusion and
creates accountability. The concept of provider diversification sounds good until
an issue arises and everyone is pointing the finger at someone else,”
Chiaradonna said.

“Additionally, a strategic partnership with a single provider
allows a firm to leverage the provider’s investment in programs such as
business continuity, information security, and vendor management. It’s been
proven that a single-source outsourcing provider creates greater
accountability, greater efficiencies and in many cases greater cost savings,”
he added.