A sharp eye on company risk

As registered investment advisory firms grow, they are beginning to take a page out of the asset managers’ handbook in creating a C-suite position to manage risk.
Many smaller firms haven’t joined the trend yet, but the role of chief risk officer has become more important at RIA firms since the financial crisis — and recruiting is increasing for these types of jobs, said Jane Swan, the head of wealth management practice at executive search firm Sheffield Haworth Inc.
“I think it’s the beginning of what’s going to be a bigger trend,” she said. “We’re definitely in a period of increased [regulatory] scrutiny.”
A CRO’s job can involve evaluating a firm’s operational risk, assessing new investment products, upholding the company’s reputation and maintaining relations with regulators. Although risk management has always been an important function for those in the RIA business, companies are now increasing their emphasis on adding the role at an executive level, said Dan Solo, executive director of the business and professional services practice for Sheffield Haworth.
“The regulatory community and pressure has really driven a more formalized approach to setting up a risk culture at the firm,” he said. “The CRO has become a key partner in crime as a control person within an organization.”
However, some experts in the industry say a CRO isn’t needed at all firms. Bryan Baas has been the director of risk oversight and controls for TD Ameritrade Institutional for three years. One of the things his group does is track new rules put forth by the SEC and other regulatory bodies. The team then shares information with advisers about how the regulations could affect their businesses. They also educate advisers on issues such as fraud and hacking attempts.
So far, Mr. Baas said he hasn’t seen many RIAs carve out a chief risk officer role. Often, a chief compliance officer will take on a similar function. However, the need to look at risk from a bird’s eye view is becoming more apparent at larger, more complex firms, he said.
“Firms are now seeing the need for someone who has that different lens,” Mr. Baas said.
David Canter, an executive vice president for practice management and consulting at Fidelity Investments, also emphasized that a firm without a CRO isn’t deficient.
“That role may be played or dispersed throughout other employees at the firm,” he said. “Everyone has a job to make sure that they’re investing in a way that’s consistent with client objectives. Having a CRO is another form of checks and balances.”
It can be effective for some companies to spread risk management among several people or a team, Mr. Solo said, but it is becoming the industry standard to have one person at the top to manage an RIA’s risk outlook once the firm reaches a certain size. At 100 employees, a firm should take a serious look at putting a formal infrastructure of risk management in place, he said.
“There are certainly some firms out there that have a head of risk, but it’s really more of an operational type of person,” he said. “That’s clearly a step behind the industry and not the progressive way in which the industry is looking and what regulators are expecting and clients are expecting.”
Salient Partners, which manages about $19 billion in assets, brought on a new chief risk officer this fall. The CRO position has been in place at the company for about two years. Salient has more than doubled in size in the past five years and the company wanted an executive in place to look at the risk of every individual investment, as well as the company’s risk from a top-down standpoint, said Lee Partridge, Salient’s chief investment officer.
“Given the complexity of operations that we have, we want to make sure we have someone looking at our exposure to external managers and market risks from an all-inclusive vantage point,” he said.
For firms such as Salient that run direct strategies or have a lot of hedge fund exposure, hiring a CRO is becoming a best practice, he said. For more traditional registered investment advisers who are running 60/40 stock and bond portfolios and focusing on a relationship-driven business, the position may not be as necessary.
“I think it’s probably a bull market for risk management and control functions,” he said. “You don’t really make money off of those functions, but you avoid losing money and losing clients. I think for now, we’re pretty invested in that function.”
There is no one optimal skill set for a CRO, but the job requires a person who is familiar with the regulatory environment and has a commercial awareness of the financial adviser industry, as well as strong interpersonal skills, Mr. Solo said. The salary for the position also varies widely depending on firm size.
Though not critical for all RIAs at this point, Mr. Solo expects more firms to add the chief risk officer title to their roster within the next few years.
“The risk function has become a little more proactive than reactive,” he said. “That’s what’s needed to keep up with the regulatory demand.”

Related Topics: Financial Performance, Financial Planning, Wealth Management