Wealth management industry must reinvent business model to improve enterprise risk management


As current business models in the wealth management space are faced with added risk pressure from expanding industry challenges, enterprise risk management (ERM) has become critical in supporting a firm's business strategy and growth, according to a whitepaper released by SEI.

The paper, titled "SEI Insights: Risk Management -- A Strategy for Success," explores how outsourcing and technology can play a critical role in a wealth management firm's approach to ERM.
The paper discusses the need for the wealth management industry to embrace a systemic business model change by using single, unified platform outsourcing solutions to improve risk management practices in an increasingly complicated environment.
"Managing risk is complex, and systemic awareness and mitigation are becoming vital to business growth as firms face increased regulations, evolving client demands, and heightened cost pressure," says Al Chiaradonna, senior vice president, SEI Wealth Platform. "Achieving success in this area will require more than simple stopgap measures. The wealth management firms that succeed in enterprise risk management will differentiate themselves by evolving their business models and finding the right balance between risk, cost, and value across their firm."
The paper examines the role of outsourcing and identifies the risk management benefits to firms in the wealth management industry who make the change. As discussed in an earlier paper titled "SEI Insights: The Legacy of Legacy Systems," wealth management firms can manage as many as 50 disparate legacy systems and equally as many third-party vendors. When a firm consolidates these systems by outsourcing operations, hosting, and infrastructure to a single unified platform, much of the risk is reduced through a single outsourced relationship. This type of strategic partnership allows firms to leverage the outsourcing provider's investment in ERM governance, as well as policies, procedures, and personnel devoted to ERM.
The paper also discusses the role technology can play by turning disparate data points into integrated executive information. Increasingly in need of better data and risk management technology, wealth management leaders would benefit from consolidated information that better enables business risk evaluation, and reporting to all levels of management through one consistent view. With many firms operating on multiple legacy systems with different data sources and little integration between them, the wealth management industry must embrace a more systemic approach through using a single, unified platform. As a result of housing information in a single location, firms can expect to experience more accurate information and reporting.
However, the value provided by improved risk management comes with perceived cost implications. While there are significant costs associated with implementing and maintaining risk management practices, the paper explores various areas of a firm's business that can have long-term cost benefits from improved enterprise risk activities.
"Firms are naturally worried about the cost implications stemming from focusing on improving enterprise risk activities, whether it's a negative impact to the bottom line, a strain on resources, or even limitations on the ability to innovate," says Chiaradonna. "However, they need to ask themselves whether they are taking a quick-fix approach to technology or investing in a long-term business strategy. Our research indicates that the additional expense associated with embracing a unified platform model can result in stronger long-term business growth."
The paper, published by SEI Executive Connections, is the second in a four-part series, titled "SEI Insights: The Future of Wealth Management," which explores four key areas outside of the financial industry that offer opportunities for transformation in the wealth management industry.