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Risk Management Takes Center Stage at Funds


MIAMI - In their frantic efforts to cut costs, many financial services companies have been jettisoning everything that isn't absolutely necessary to stay afloat. This may work in the short term, but senior leadership is starting to realize the continued need for expertise in regulation and compliance and customer service to provide seamless risk management, transparency and communication.

"Risk management and control need to continually adapt," said Charles Rizzo, senior vice president and chief financial officer for John Hancock Mutual Funds, at the National Investment Company Service Association's 27th annual conference and expo held here at the Doral Golf Resort and Spa. "We have been laser-focused on reporting on valuation, but little things can get you into trouble, like rushed reviews and other things that can get missed." Mistakes can happen, especially when departments are overworked and understaffed, and it remains critical for companies to have a strong system of checks and balances, Rizzo said.

Most firms had risk management teams in place last year, but no one could predict the extent of the damage caused by the credit crunch in so many areas.

"We did not look at risk at a broad enough level," said John Murphy, chairman of OppenheimerFunds and chairman of the Investment Company Institute. "We were severely under-appreciating the worst-possible scenario. Risk management failed on all levels."

Risk management needs to become a permanent part of the investment industry culture at all levels, not just with the money managers, Murphy said.

"Last year, everything went down-the good, the bad and the ugly. There was a blindness to risk at a systemic level," said John Cammack, head of third-party distribution at T.Rowe Price. One consequence of this blindness was that valuing practices succumbed to the culture of risk, he said, and values lost touch with reality. Everything became so interwoven that it was almost impossible to tell good assets from bad ones. In this case, a few bad apples spoiled the whole bunch.

"You're only as strong as the weakest party you do business with," he said.

Many fund companies are starting over at square one to figure out how to accurately value anything.

"Right now, we are going through a period of soul searching, trying to come up with a durable value," Cammack said. "But I don't know if we should throw out the baby with the bath water just yet."

"Everyone should really take a hard look at their policies and procedures with regards to valuation," said Robert Byrnes, assistant treasurer at Fidelity Investments. "Even some of the controls need to be reevaluated." A key step to figuring out the proper value of various instruments will come from increasing transparency.

"Mutual funds already have a lot of transparency, as well as daily pricing and daily liquidity," said Anne Ackerley, managing director and chief operating officer for U.S. retail at BlackRock. "I think people will look to mutual funds" as an example of how transparency works.

"The level of detail and the amount of information required has risen dramatically during the current crisis," said John Capone, a partner with the asset management practice at KPMG LLP. "This requires a lot more follow-through and documentation.

"Distressed, fire sales are especially difficult to value," Capone continued. "Many times, it becomes more of an art than a science."

"All of this is coming at a time when assets are down," Rizzo said. "Our foundation is solid, but cracks can happen if you're not careful."

The inherently complicated nature of some of the instruments will hinder efforts at increasing transparency, but then again, "if you don't understand it, maybe you shouldn't invest in it," he said.

Unpredictable and inexplicable market activity has certainly rattled investors. While most have remained invested, they are looking for answers and advice.

"We've got to re-instill trust and confidence among investors," said Bill Dwyer, president of independent advisor services for LPL Financial. "Consumers are looking for solutions."

"Rebuilding trust will require us to provide good, clear information and remove products that don't work," added Paul Feeney, executive director and head of distribution for Bank of New York Mellon Asset Management.

Direct communication with investors through mailings, webinars and phone calls is critical during stressful times, as well as communicating with the media.

"The biggest mistake firms can make is to cut back dramatically on client service," Ackerley said. "Our clients need us now more than ever. Revenue will be down dramatically, but we need to be out there communicating with clients."

While it may seem logical to trim staff in the public relations and marketing departments, there needs to be experienced personnel who can communicate with the public if and when things blow up.

"No one was adequately prepared to communicate with the media and with shareholders," Murphy said. "The media and investors wanted answers immediately, but we didn't have any answers. We need to work toward communicating the right information in the right ways at the right time."

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