In a recent conversation with a former colleague and financial services marketing pro, we talked about the accelerating pace of business and how it’s impacting marketing teams and their firms.
One point we agreed upon is that rapid responses to fast-moving opportunities are critical to success these days, but equally important is mitigating the risks that crop up in these situations.
It’s a familiar scenario: our team is excited about a big opportunity that came in at the last minute. But to be considered, there’s a tough deadline to meet. In the rush, corners are sometimes cut and mistakes can occasionally slip through in client-facing materials. When that happens, asset management firms are exposed to three distinct types of risks – operational, reputational and regulatory. Following is a quick look at each and why they’re important.
Operational risk – Operational risk boils down to the human factor: it’s when something goes wrong in business operations due to human error. More specifically, it’s the risk of financial losses stemming from missteps due to inadequate or failed policies, procedures or systems.
Sometimes this risk plays out on a global scale, such as in the financial crisis of 2007-08. But for individual firms, operational risk more often shows up much smaller episodes. For example, if the wrong share class is referenced in client-facing materials (e.g. Large Cap Value instead of Large Cap Growth), the mistake makes the material a liability. The time and money it costs the firm needs to pull and redoing the material resulted from operational risk.
Reputational risk – In financial services, a firm’s reputation is arguably its most valuable asset. Reputational risk is potential damage to a firm’s reputation due to the actions of employees. When widespread malfeasance is involved, reputational risk can be catastrophic. Arthur Andersen found this out the hard way with its handling of Enron’s books. So did News of the World, with its phone-hacking scandal.
These spectacular crashes of corporate reputations are fairly rare, and they need not involve conscious misdeeds. Something as simple as a lack of attention to detail can do in a firm’s brand. Like operational risk, the erosion can stem from many small and low-profile actions by employees. If, in our example of an error in client-facing materials, the same type of mistakes happen regularly, a firm’s reputation will suffer.
Regulatory risk – In a broad sense, regulatory risk refers to the potential impact a change in laws or regulations can have on a business. One example is what proposed EPA regulations would mean for coal-fired power plants.
But like the other two risk buckets, there are smaller but still costly regulatory problems firms can run into if they are not careful. In our example of errors in marketing materials, if those mistakes involve incorrect or misplaced compliance notices, they can create costly headaches for firms.
There is nothing that asset management firms can do about the ever-increasing pace of business. They can, however, avoid many of the risks that naturally arise when conducting business at hyper-speed. The main thing they need to do is to always pay attention to the small details. Their reputations and businesses ultimately depend on it.