Managing assets and wealth with risk in mind

In a nutshell: Keenly adept at managing financial risks, asset and wealth managers now need to become equally well-versed in nonfinancial risks arising from their ambitious growth plans. This means AWM (asset and wealth management) firms will need a new approach to risk management — one that’s focused on making the right adjustments to create short- and long-term value for their firms and customers.

Responding to rapid changes in asset and wealth management 

The asset and wealth management sector is rapidly changing. Assets under management reached a record US$119.5 trillion last year, nearly three times the S&P 500 Index’s total market cap.

According to PwC’s 2022 Global Risk Survey, 64% of AWM firms predict revenue growth over the next year. Forty-four percent expect an increase of up to 10%, while 20% of firms anticipate revenue growth of more than 10%. 

The top factors driving growth in AWM are new products and services (15%), new customer segments (13%) and strategic partnerships (11%). 

But some firms are not so optimistic, and 23% expect a decrease in revenue over the next year. Factors behind this negative outlook include a decline in demand (15%), COVID-19 impacts (15%) and supply chain disruptions (13%). Amidst growing uncertainty about the global economy, AWM firms are also contending with the growth of cryptocurrency, a new generation of investors, market volatility and a growing preference for fintech products. 

Despite record flows of $1.2 trillion into long-term mutual funds and exchange-traded funds in 2021, fees collected by active managers declined by 4%. Meanwhile, passive assets are on the verge of overtaking active assets in US-based mutual funds and EFTs, with 42.9% of assets (about $10 trillion) managed passively, up from 31.6% (or $4.1 trillion) at the end of 2015. 

“The more that we can harness the power of talent and the power of technology, the more likely we are to find ourselves in a successful position.”

— Stephanie Bruce, abrdn plc.

In response to these challenges, some firms are reinventing their business model altogether. Traditional long-only asset managers are exploring private market platforms to meet growing investor demand, and wealth managers are expanding into employer services. To facilitate these changes, many firms are turning to technology to help. 

“The more that we can harness the power of talent and the power of technology,” says Stephanie Bruce, Chief Financial Officer at abrdn plc., “the more likely we are to find ourselves in a successful position.”

Few firms have found a way to fully adapt. An incremental or fractured approach might seem like a safer bet, but it can also create some major barriers to success. Some firms lose sight of the big picture because they’re too focused on which new product or service to adopt, customer segment to target or strategic partnership to form. Other firms are resistant to change altogether because they’re worried about how it might impact their operations, ecosystems and partnerships. 

As they look for the next new development, many firms are looking inward. But this inward focus can make it more difficult for firms to make decisions efficiently, and as a result, many firms lose out on new growth opportunities because they aren’t able to act quickly enough. 

But with major change also comes new risks. As they plan for the future, asset and wealth managers should be thinking about these new risks and where they’re most likely to arise.

New risks in asset and wealth management  

Financial risks aren’t new to firms, but nonfinancial risks are fast becoming more important to manage. Successfully managing multiple types of risk requires a panoramic approach — one that provides a 360-degree view of risk to help companies avoid blind spots and identify more opportunities for growth. 

Of the potential risks posing problems for AWM in 2022, the sector is most concerned about market risks (29%), business and operational model risks (20%) and talent risks (20%). 

Market risks: AWM firms are operating in an increasingly turbulent industry market, with competition on the rise. At the same time, global growth is expected to moderate. Driving this situation are interest rate hikes, high inflation, COVID-19 resurgences and waning stimulus payments. And, as the financial market continues to change, so will your investors’ financial goals. AWM firms should adjust accordingly.  

The sector expects a number of disruptive trends over the next three years. Asset and wealth managers are most concerned about retaining investor demand, with 74% actively monitoring or implementing a risk management plan to understand these risks. 

Business and operational model risks: Technology is revolutionising the AWM industry with advances in cloud-native development, blockchain, AI and real-time data analytics. Traditional firms are catering to new demands by exploring new business and operating models. They’re expanding into alternative investments, investing in private equity and outsourcing noncore operations. Competition will only get fiercer as mergers and acquisitions, strategic partnerships and increasingly large transactions concentrate a disproportionate amount of assets and wealth among fewer firms. 

The impact of industry consolidation is the second highest concern for AWM, with 73% monitoring or implementing a risk management plan in response. In third place are concerns about the emergence of combined human and tech advisory models, with 67% actively addressing these risks.

What’s next for risk management in AWM?

Asset and wealth managers should look to the top 10% of all respondents to PwC’s 2022 Global Risk Survey, which are realising benefits by implementing these growth-focused risk management practices. The top 10% are five times as likely to report confidence in achieving their risk management goals in 2022-2023, and they tend to be acutely aware of the challenges facing risk management today, rating all of the challenges as very significant. They’re also twice as likely to be increasing investments in risk management technology by more than 10%.

With the industry taking on so much change, 75% of firms find it especially challenging for their risk management functions to keep up with the speed of digital transformation. AWM firms also reported other very significant or significant challenges such as external compliance pressures taking up time and resources of risk functions and risk owners (75%) and lack of access to digital tools and enablers for risk management activities (71%).

Investing in tech

Fifty-nine percent of AWM firms plan to increase their risk management tech spend in 2022, with 20% planning an increase of more than 10%. This figure is in line with the 20% of firms expecting revenue growth of more than 10% over the next year. Thirty-two percent of firms are significantly increasing their tech spend on data analytics, with process automation (32%) and detection and monitoring of risks (28%) close behind.

AWM organisations are also putting more tech spending into workflow management (23%) and reporting and visualisation (20%).

Investing in people

Seventy-three percent of AWM firms expect to increase spending to add technology and digital capabilities, but fewer are investing in the risk function workforce itself. Sixty-three percent are implementing diversity, equity and inclusion programmes and reorganising the structure of the risk functions. 

About half of AWM firms (51%) are augmenting their cybersecurity risk functions via managed services, with 37% spending more on third-party risk management and 36% investing in know-your-customer (KYC) processes. 

Creating a panoramic view

The responsibility for risk management is concentrated among C-suite executives. According to AWM firms surveyed, the chief risk officer (CRO) is primarily responsible for managing compliance risks (22%), the chief financial officer (CFO) for financial risks (49%) and the chief operations officer (COO) for operational risks (34%). At the same time, 63% cite the lack of a coordinated approach to enterprise risk as a very significant or significant challenge, and 62% report that the unclear division of responsibilities and accountability for risk is a very significant or significant problem. 

Asset and wealth managers have an opportunity to improve risk management by designating the CRO as the single point of responsibility and accountability for risk management. Currently, 60% of AWM firms are increasing their spend on building the three lines of defense — the teams responsible for executing risk functions — and 62% are redefining the balance of resources across the three lines. Coordination among risk managers and risk owners is critical for AWM firms if they want to keep up with industry-wide changes, and having a CRO can help.

Rethinking risk management

New risks require a new approach to risk management in AWM. In our experience, the more successful endeavors are the ones that invest in people and tech for a panoramic view. With just 30% of AWM firms realising the benefits from a panoramic approach, most organisations have a long way to go.

What stakeholders in AWM should do next

For CEOs

  • Consider establishing a change risk management function/capability as part of ERM. Whether it’s an acquisition, new client base, a third-party venture or a new product, for every major business decision, make sure you understand how it will impact your organisation from a risk perspective. 
  • Ask project owners concrete questions about the consequent risks of change. Do we have the right skills to assess the opportunity/enter into the venture? How will the initiative affect the overall risk profile? Will it affect the organisation’s risk appetite? Is there a risk mitigation strategy for these risks outlined in the business plan?
  • Separate the chief investment risk officer (CIRO) role from the CRO role so that operational risk has its own focus and investment of resources.

For the board

  • Shift the reporting line directly to your risk committee, including both risk owners and managers in important strategic conversations. 
  • Insist on an integrated view of risk with applicable key risk indicators for the major risks.  
  • Request real-time dashboard access to follow key risk indicators and status of management action plans.
  • Ask for regular education sessions on major risk topics, delivered by outside specialists to help drive the proper board oversight.

For risk executives/leaders

  • Reassess the data you’re receiving, the tools you have at your disposal and your team’s skills in light of the expanded and evolving risk universe.
  • Find opportunities to outsource noncore competencies to third parties whenever possible. You won’t be able to keep all the skills you need in house and respond quickly and appropriately to new risks.
  • Think about how you assess and monitor how the risk of change is addressed — new ventures, new products, new sales channels. What needs to change in your ERM programme to deal with change risk? 
  • Implement a risk awareness programme and engage stakeholders at every level, including employees, business leaders and the board.

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Kristin D’Ambrosio

Kristin D’Ambrosio

Asset Wealth Management Sector Leader, Cyber, Risk & Regulatory, PwC US

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