by Mariah Summers
Asset managers looking to jack up returns and get an edge with investment consultants might consider joining the pack of firms on the hunt for a chief risk officer.
The role, which first gained significant attention after the financial crisis in 2008, has grown further in prevalence and scope as a result of the volatile equity markets over the past year, the proliferation of hedge funds in institutional portfolios and a general feeling of investor uncertainty, industry observers say.
“Risk is becoming a much more important piece in the puzzle,” says Barry Emen, president of recruiting firm MJE Advisors. “A lot of investors are looking to see that the internal operations are becoming more transparent. Some asset managers and hedge funds are looking for that as a first step to attract investors and make them comfortable that the business is being run properly.”
Emen says that search activity for risk management roles has picked up in the past year among his asset manager clients, and that he expects the demand to continue to build over time. To be sure, firms such as Commonfund and RBC Global Asset Management have invested heavily in risk management roles over the last few years as institutional investors’ risk aversion has grown.
“It’s kind of a spiral where if one firm does it, the next firm does it,” Emen says of hiring risk officers. “As more and more people become more risk-aware, the investors are going to start demanding it. The search activity is increasing.”
Another recruiter has also seen a recent uptick in chief risk officer searches by asset managers as investment consultants have increasingly emphasized the role.
“One of the key questions pension consultants are asking is, ‘Do you have a risk officer?’” says George Wilbanks, managing partner of executive search firmWilbanks Partners. “Then they want to go sit and meet with that risk officer.”
Wilbanks adds that having a holistic chief risk officer role that spans multiple asset classes and industry sectors can also help managers improve their investment returns.
“The most valuable place I’ve seen the role is when you have a chief risk officer who is responsible for all of the risk across multiple disciplines at the firm – across all products,” Wilbanks says. “Each one of the asset classes will typically have a very well-defined set of risk parameters. If you have one person with oversight of it all, you may find that the bond guys, in pursuit of yield, and the equity side, in pursuit of lower volatility, are both ending up holding significant concentration in telecom or financial stocks, and you realize that your clients are way overexposed to a certain strategy.”
In addition to spreading the risk officer’s oversight across various asset classes, countries and industry sectors, Wilbanks says it’s also beneficial if managers treat the role as more of a counselor than an enforcer.
“The role tends to be less of a traffic policeman and more of a coach and a mentor,” Wilbanks says. “It’s someone who is mining information across products at the firm.”
As more managers look to hire chief risk officers, one risk management expert says, their responsibilities and stature are on the rise.
“Before 2008, typically only the bigger firms had a chief risk officer, and it was mostly used as window dressing,” says Sam Won, managing director at Global Risk Management Advisors, which provides third-party risk management services to both institutional investors and asset managers. “After the financial crisis hit, investors started asking questions about process, control and governance.”
And with a growing number of managers looking for risk officers who truly tackle risk, instead of merely identifying it, Won says there is now a dearth of talent in the industry.
“There aren’t that many people to go around, so even today if there’s a major chief risk officer job that comes up, we get the phone call,” Won says. “There is a huge supply-demand imbalance of really experienced chief risk officers. Asset managers are hiring mid-level professionals and just calling them risk managers. Unfortunately though, that midlevel type of job is just a risk measurement job, not a risk management job. Risk management is what you do about the risk; it’s part of the investment process.”
In order to truly mitigate risk, Won says asset managers need to employ a set of fundamentals in their risk management efforts.
“You have to have infrastructure, process, control, governance and a risk framework,” Won says. “These are some of the things that are coming together to force more hiring of risk managers and make the role more substantive.”
Striving to find people to fill such a role will likely become an industry standard among managers, Wilbanks believes, as more institutional investors begin to recognize risk management’s importance and potential benefits.
“From the end investor’s point of view, when you put money with managers, they have sold you a certain set of expectations,” Wilbanks says. “To the extent that the returns match those expectations, investors will always be happier.”