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What’s your business risk appetite?

Assessing your firm’s attitude to business risk will determine whether you take the network route or go it alone, says David Carrington, Marketing Director, Personal Touch Financial Services

As every adviser is only too aware, the management of risk is a vital component of solid financial advice on behalf of our clients. And increasingly with economic, political and interest rate uncertainty, the management of any small business, regardless of sector, presents its own risks. For those in the regulated financial services sector, business risk is becoming a much more complex animal and one which many directly regulated firms are finding a source of increasing anxiety. So is life any easier for a network member?

In the debate over whether to be a network member a number of key issues are usually overlooked. Whilst impressive lists of new technology and services are sometimes enough to lure a directly regulated firm into a new home, a few new tablet computers and some great graphs will do little to persuade a regulator of any reduction in risk management. One of the core areas of support we provide to our member firms is therefore the whole support mechanism surrounding management of risk within the firm’s business. Managing the right risks in the right way is critical for the survival and future prosperity of any advisory firm.

In a regulated business there are three types of risk to consider.

Financial – how safe is your profit? The bottom line might look good but if business drops off or you generate a stream of complaints then the mirage of profit will soon disappear.

Operational – how robust are your systems and controls? Are you delivering good consumer outcomes by accident or design? Any discussion with the regulator will focus as much on the process that led to the advice as much as the actual advice itself. If the client outcome was good but the process that got you there was high risk then there may be problems

Conduct – How do you ensure you deliver good consumer outcomes? Do your incentive schemes promote good outcomes or just reward sales volumes? Clearly a scheme promoting good outcomes poses less of a risk to your business.

Having identified the types of risk within a business the next set of decisions revolve around how much risk you are prepared to take – what is your risk appetite? As an example, we have a zero risk attitude to activities focused on increasing profit if customer outcomes could suffer.

The same approach is taken with the number of client files we check. The appetite for risk for elderly clients investing in equity-based products means we check every file covering this business area – whereas we would sample check lower risk products such as buildings and contents insurance.

Managing risk can be a very challenging process, especially without support, but with the Regulator increasingly seeking more and more reassurance in this area you don’t really have a choice: unless you step up to manage the risks and take control there is always the danger that the risks will manage you.

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