In this article, we consider the goals of risk management and its place in the financial services ecosystem.
It’s important to start by casting our minds back to 2008. This was when the property bubble burst across the Atlantic, with the global financial crisis it unleashed exposing numerous flaws in risk management systems.
Since then, governments and financial services have shaken up the way risk is perceived and managed. The Basel III Accords in 2010 beefed up the global regulatory framework to make banks more resilient to economic shocks. New phenomena such as crypto have also changed the fintech landscape.
What is risk management?
It is important to be able to define risk. Understanding risk is being aware there is a chance you may incur loss or injury by endangering at least some of your investment. In the world of finance, investment risk is the probability that the actual outcome of an investment will differ from the expected outcome. Risk management is a process that is undertaken by banks, insurance companies and investment managers.
There are different steps that form the basis of a risk evaluation. Identification of the risk is the first stage where possible events or occurrences could have a damaging monetary impact. The next step is an assessment of each financial risk so you can prioritise them by urgency. Monitoring might be qualitative or quantitative. Then, there is risk mitigation. This refers to the strategy of taking preventative measures to reduce threats
In the financial sphere investment risks fall into four categories, Alpha, Beta, Standard Deviation, and Sharpe Ratio. There are also market risks, credit risks and liquidity risks
Risk management techniques
Different techniques are used to manage risk. Retention is a strategy which means accepting risks and not controlling events as the price to pay for a potentially lucrative return. Sharing involves splitting the risk with other entities. Transferring passes the risk on to a third party. Avoiding risk altogether is when you gravitate towards ‘safe’ investments.
Active portfolio managers
Active portfolio managers can help manage risks. They are there to support decision-making and help investors make tricky financial judgement calls. With sound advice you can minimise losses, ensure stability, protect value and ensure compliance. For solid guidance from a financial planner in Cheshire, call Hartey Wealth Management today to set up an appointment.
