However, most private banks in Asia mainly operate on a very small fraction of an individual’s wealth, which is a major hurdle to the true implementation of a holistic risk management system. “The kind of risk management practices that may be used on a small sliver of a portfolio are very different to the strategies that can be applied to a total portfolio,” argues Peter Ryan-Kane, head of portfolio advisory Asia-Pacific at consultancy Towers Watson.
Private wealth clients seek out different providers for different skill sets, the banks often use different risk strategies and the parts of the client’s portfolio each of them manage are very different too. But risks, unlike returns, cannot be added to make up a total portfolio risk, says Mr Ryan-Kane. “The claims around holistic risk management in the private space are pretty overstated, whereas institutional investors and their stakeholders are better equipped to think about risk management across all dimensions of the portfolio.”
Although private banks claim to offer a risk monitoring service on their clients’ entire wealth, individuals are often reluctant to disclose their total portfolio to one provider. This is a deadlock situation for both clients and providers. “What banks can do is to improve risk management at lower levels, and many of them have certainly done so,” says Mr Ryan-Kane.
This means devising the right asset allocation to achieve clients’ objectives, monitoring incremental risk derived from adding new asset classes, improving due diligence on managers and down to the security level, both in terms of monitoring volatility and impact of potential default.
The selling process, normally skewed to relationship manager remuneration, is certainly another area that requires more work. “The remuneration process for relationship managers drives portfolio behaviour and recommendation behaviour more than it should,” he says. “Rather than denying it, private banks should recognise it and put in place processes and systems that put the client first.”
Moreover, the quantitative side should play a pretty small role in risk management, says Mr Ryan-Kane. “The reality is that most risks that occur in portfolios and in markets are just not captured by data. When things go wrong, the most frequent reaction is complete and utter inactivity, because they just don’t have a framework for dealing with emergencies. It’s like setting off onboard a submarine, without any clue as to what you are going to do if the thing springs a leak at a thousand feet underwater.”
Most of the effects of the crisis took a while to flow through markets. When Lehman failed, the market reached its lowest point only six weeks later, but most people did nothing in those six weeks. “People don’t think about contingency, and that’s because a lot of the process is too product focused,” says Mr Ryan-Kane.
BASIC LEVELS
A successful risk management strategy comes from finding a good balance between the quantitative and qualitative side, believes Didier Duret, global CIO, ABN Amro Private Banking. “The room for improvement is really at the relationship manager level. RMs should be more educated about the risk of each instrument and about the concept of diversification,” he says.
Today, relationship managers are able to talk about total risk, tracking error, contribution to risk and are aware of the risk tools available to them, all of which was unknown before the crisis, he says, explaining that the Dutch bank has been working with business school Insead to develop a customised risk management programme for advisers.
Pre-Lehman, risk specialists used to look at risk just from the pure quantitative perspective. Today they have broader skills, they are generally more hands-on and have often had client-facing experience. “Risk management people are generally more humble today. They would like to connect with the client and have a more personalised approach.
“The problem in risk management is to avoid the silo mentality, and Lehman was very interesting for that,” says Mr Duret. At ABN Amro, some divisions were negative on Lehman as a credit risk, but other divisions such as the one responsible for structured products or deposits had not assessed the counterparty risk. “What was missing was the bridge between the pure credit risk and the counterparty risk,” he admits.
The partnership agreement that ABN Amro Private Banking signed last year with Lyxor, the hedge fund subsidiary of Société Générale, responded to the need to provide a higher level of risk management and transparency in the alternative space, claims Mr Duret. The move was made mainly to meet demand for hedge funds, coming particularly from clients both in Asia and Switzerland, although the Dutch bank’s clients typically have had little exposure to hedge funds.
