Mitigating Reputational Loss in Asset Management
By Henry Umney, Director, ClusterSeven
Reputation is highly valued in the asset management sector due to the nature of the business. Clients trust their asset management firm to make the right investment decisions to achieve their financial objectives. In the event of even a single error that leads to a poor investment decision or losses, there is a direct impact on the reputation of the asset management firm in question. Inaccurate statements to clients on the status of their transactions also impact a firm’s reputation.
There are three key areas that asset management firms must focus on to mitigate reputational losses:
The complexity of operational risk is growing in asset management, due to the global economic environment, regulation and systemic business vulnerabilities. Case in point are low interest rates that are forcing firms to develop more complex trading scenarios to offer clients ways of generating higher returns. However, existing portfolio management and risk systems aren’t typically able to accommodate these new investment strategies requiring professionals to resort to spreadsheets to create and manage them. Consequently, the increasing need to use spreadsheets within the asset management world makes them one of the major contributors to operational risk if uncontrolled – and yet many organisations overlook their impact and criticality to key processes. They are leaving themselves open to error and reputational risk.
Asset management firms must develop spreadsheet usage policies as part of their operational risk management strategy and leverage technology to ensure its enforcement.
Knowing the individuals employed
Rules including the Senior Managers Regime, the Certification Regime and the Conduct Rules are aimed at enforcing individual accountability as a means of protecting customers and minimising market abuse. A fundamental requirement of these regulations is for organisations to know who they employ, do the necessary credit and CRB checks and ensure that do no wrong. It’s a tough ask.
Firms therefore need to consider adoption of systems to establish and maintain controls to protect themselves and indeed their clients from inappropriate actions of their own employees. Such systems encompass everything from on-boarding to ongoing screening and monitoring through to adverse media monitoring.
The above mentioned Senior Managers Regime is designed to make senior managers fully responsible and in control of their actions in an evidencable and defensible manner. For instance, investment directors must have complete knowledge of the tools used by their teams in decision-making, they must take reasonable steps to ensure data accuracy in the models used for decision-making as well as ensure that team members manipulating and interpreting the data in the models are certified and equipped with the necessary knowledge to do so.
The reality though is that many asset management organisations, due to the complexity of business, regulatory requirements, and the vast spreadsheet landscape, struggle to achieve the transparency that regulators are demanding. Anecdotal evidence shows that in the case of investment products, due to a lack of transparency, wrong decisions based on flawed valuations have been made, resulting in incorrect payments to clients, causing acute embarrassment to the organisation. AXA Rosenberg is a case in point – the Securities and Exchange Commission charged three AXA Rosenberg entities with securities fraud for concealing a significant error in the computer code of the quantitative investment model that they use to manage client assets. The error caused $217 million in investor losses.
Asset managers are fully aware of spreadsheet risk to their business and the long-term impact of reputational damage caused by such errors, and yet they are ignoring taking corrective action. A technology-led approach to spreadsheet management can help mitigate reputational losses by enforcing best practice processes across the business; providing an intuitive and embedded structure to support individuals at all levels to be accountable and responsible for their actions.