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Wealth Managers Get Defensive As Risks Swirl - Deloitte

Jackie Bennion, Deputy Editor, October 22, 2020

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Firms may have congratulated themselves on how they've shifted to working from home, but there have been challenges such as protecting a firm's reputation when colleagues cannot interact with clients as much as they would like, and the fatigue caused by lockdowns and restrictions.

These days it is impossible to talk about risk without talking about the part technology plays. The risk advisory practice at Deloitte in New York is being invigorated by how corporations handle the reality of rapidly decentralized operations in the wake of the pandemic.

“People are working from home so data has become more important. I am seeing clients who are trying to understand and use the data sets and analytics to identify risks and protect against them,” Karl Ehrsam, global lead for wealth management and principal at Deloitte Risk and Financial Advisory, said. It is causing organizations to set up centers of excellence around risk analytics so that they can be quicker at connecting risk events, Ehrsam added.

As we continue our coverage on attitudes towards risk in a year that has been full of them, we asked what new risks firms are encountering and what protection they are taking. Ehrsam’s group focuses on non-investment risk factors for wealth managers and private banks that include regulatory, operational, and cybersecurity risks.

Conducted over Zoom, Ehrsam’s responses invariably circle back to technology.

Gone are the days of simple lexicon-based searches that tag 10 or 20 keywords to identify potential risks across a financial institution, which might include market manipulation, unfair trading practices, and other inside surveillance, such as cybersecurity threats, Ehrsam said.

“Whereas before, when electronic monitoring happened in silos, organizations now are thinking, how do I view [risk monitoring] as one singular platform to indentify patterns of risky behavior?” It is largely what the pandemic has forced firms to consider as workforces and operational tasks have been dispersed far and wide.

Take someone trading in a personal trading account. That may be perfectly fine, Ehrsam suggests. But link it to an email or some other activity by the trader and it might indicate collusive or fraudulent behavior once you start piecing bits of data together. “A silo approach wouldn’t catch that,” he said.

Another substantial change Deloitte's wealth management clients are grappling with is how do you observe employees who are no longer office-based?

Ehrsam argues that this is a critical element of the supervision.

“When someone comes into the office every day you get to observe and supervise them firsthand. And there’s a comfort in that. But now people aren’t coming to the office, you are not getting that direct line of sight or those daily conversations so you are looking for signals in the data rather than in the human interaction.”

Fatigue
In the early months of the pandemic, businesses were congratulated and surprised themselves by how well operations held up under new remote-working conditions. But from Deloitte's ringside seat, fatigue and other performance factors are now taking their toll. "I used to think in the first few months of this that everyone’s productivity went through the roof because what else did they have to do?” But the problem is that there are still far too many disconnected back-office manual processes functioning on old technology. “As a result, operational errors are rising,” Ehrsam said.

Getting a pulse on the cultural health of a business is another concern as people are no longer sitting across from one another able to pick up on those critical in-person cues. Or for that matter provide mentoring, extemporaneous collaborating and, in defense of humans, all those other unique traits that have taken us millennia to develop.

We asked Deloitte how this lack of physical interaction might be affecting a firm’s reputation risk.

“It is an interesting question. We are talking to a client that is very concerned around their culture. They are saying: ‘What is changing about my business and what are the longer term changes? And how does my organization’s culture protect specifically against reputational risk?’”

The bricks holding your business together is your culture, Ehrsam explains. “If it breaks down, it is often what exposes you to reputational risk because it is a failing of your people when something arises out of bad culture."

In the world we live in, organizations are rightly worried about their reputation and COVID-19 has only increased scrutiny. "It gets back to how do you make sure your people are making the right decisions as they face the obstacles of their job. And that often comes down to how you act when no-one else is in the room watching you,” Ehrsam warns.

Others pressures changing technology decisions for wealth managers are coming from regulators; notably meeting new regulation “Best Interest” rules introduced by the SEC last year on the transactional brokerage side. The compliance is aimed at strengthening fiduciary standards for broker-dealers when making any securities recommendations to retail investors.

Ehrsam says the measure has speeded up advisory firms using technology to pull in third-party info and data to be able to make product comparisons. “It’s one space where we are seeing a lot of technology advances in terms of being able to meet these new best-interest obligations.”




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