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Written by: Maureen Doyle-Spare | UST
Financial advisory firms need to review their risk management plans given the recent uncertainty in the banking sector and its effect on overall market in the United States and across the globe. However, in an age of disruption, this requires taking a number of emerging factors into account, including the power of technology to allow customers to communicate concerns widely, an impact that it can have on management accounts. Ironically, technology can play a strategic and resilience-building role in risk management to ensure smooth, ongoing operations. Innovative technology investments, combined with strong leadership can play a crucial role in enhancing the risk management function.
Risk management is necessary for financial advisory firms – as well as other financial institutions – to maintain their financial health, protect customer investments, and comply with regulatory requirements. Managing risk effectively allows these firms to mitigate potential losses, prevent financial crises, and improve overall performance.
Leading financial advisory firms recognize risk management’s critical role within their organizations -- now they are focusing on strategy. As a result, chief risk officers are transitioning away from a narrow crisis response mode to a more agile state. This is an excellent first step but improving the quality of risk monitoring and decision-making necessitates the collection of new internal and external data, along with modern technologies such as AI, which can provide early warning systems and real-time controls.
Within this context, risk leaders are emphasizing two essential themes:
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Developing more sophisticated risk-identification processes that can rapidly detect new risks and assess their potential impact.
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Investing in foresight tools that require real-time quantitative data to define scenarios and understand their impact on a financial institution’s primary metrics.
When facing unexpected disruptions, organizations that possess strong AI capabilities can identify potential issues by analyzing publicly available unstructured data from news articles, press releases and social media activity. As a result, these organizations are equipped with precise intelligence to effectively protect against these threats and mitigate risk. These advanced models are capable of tracking changes in the number of online search queries which form the foundation of the critical sentiment analysis segment of a risk assessment. This means that along with the regulatory and market information segments, analyses can be derived, and plans can be prepared to face a range of client or industry-specific issues.
Actionable benefits of a fully developed AI risk management approach include:
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Data-driven Insights – AI's data-driven insights can analyze large volumes of data from various sources, identify patterns and anomalies and highlight potential risks.
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Proactive Prevention – AI can proactively prevent risks before they escalate into problems by using predictive analytics, scenario analysis or simulation techniques.
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Adaptive Learning - AI's adaptive learning capabilities can leverage a firm's past experiences to improve risk management capabilities, store knowledge and best practices of risk assessments, controls and mitigation plans and use them to enhance future performance.
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Enhanced Collaboration – AI can foster enhanced collaboration and communication with stakeholders such as employees, customers, partners, or regulators, by using chatbots, voice assistants, or sentiment analysis.
Moving forward, financial institutions will need to increase their digital technology investment to improve their risk management capabilities and boost resilience to potential risks. But success will not be defined by the total resources invested – instead, those that invest effectively will be best positioned against risk. Digital technologies provide financial advisory firms and other institutions with many advantages, including the ability to analyze vast amounts of data at a faster rate, automate processes leading to a reduction of errors, and allow for more sophisticated risk models, as well as enhanced stress-testing scenarios which help banks better understand their risk exposure.
An example of how this can be applied can be seen in the credit risk management function that allows a financial advisory firm to aggregate publicly available information, such as a client’s financial information, market information like equity prices and yield curves, business news and social media content, as well as potential regulatory impacts. After this assessment, AI models can be implemented to determine whether action needs to be taken to determine the next steps.
An example of how this can be applied is of a wealth management client of an introducing broker who clears through a Correspondent Clearing Broker. The Clearing Broker’s risk management tools pick up trading activity outside of the client’s normal activity. It sets its AI tools to scan and aggregate publicly available information including social media, regulatory and business news on the client as well as potentially other associated accounts of the introducing broker, as well as the introducing broker itself. With this information, the clearing broker can evaluate if there’s any trouble with the client or the introducing broker and take appropriate action. It can halt trading on the account, close the account or if the activity is more widespread, it can ask the introducing broker to leave.
Digital transformation is already helping many financial institutions improve their risk management capabilities, reduce costs and proactively mitigate potential risks. However, by leveraging digital technologies, financial advisory firms can go even farther to improve their decision-making, manage risks more effectively and stay ahead of emerging risks. In an increasingly connected world with more uncertainty than ever before, this will be the key to sustained growth.
Maureen Doyle-Spare is the general manager of Asset & Wealth Management, at UST, a leading digital transformation solutions company based in Aliso Viejo, Calif. Maureen has more than 25 years’ experience advising on financial technology to deliver innovative solutions to her clients.
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