The financial crisis of 2007 led to strong and well-deserved criticism of the risk management practices of financial institutions. The result was an increase in compliance requirements as customers demanded greater transparency.
If investment advisers cannot instil confidence, then their main product – the advice they give – has no value. Nice words no longer cut it. Rather, the customer wants documented legal certainty with associated legal rights. Meanwhile, banks are suffering in the current market situation. Very low and at times even negative interest rates are squeezing their margins, just like the new compliance regulations.
The only way to properly address these challenges is through modern consulting solutions: these can reduce the time required for preparing and documenting consultation sessions and automatically create a suggested portfolio based on the customer’s risk profile. Such a solution can also make it possible to test the impact of various scenarios on the portfolio’s performance – like external shocks such as 9/11 or the Lehmann crash. But that is not all.
Static presentations of results are out-of-date. A modern solution makes it possible to adjust each variable to illustrate the effects of individual instruments in real-time, during the consultation. This can illustrate the effects of a focus on green tech or Islamic banking, for example. It is a testimony to the power of the consumer that such features are not only asked for, but implemented.
Clear to non-specialists
A good solution can also record the nuances of a particular consultation, documenting these based on the chosen settings. This reliable record of what has been said can then be used to show compliance, creating legal certainty for both the customer and the adviser. All relevant details can then be summarized in a brief report written in language that is easily understood by non-specialists and supplied after the consultation. The customer then signs the documents to confirm that they have been adequately informed of the risks.
With compliance being such a hot topic, any proposed solution must be able to navigate the jungle of regulations. Yet this jungle is constantly growing and evolving, and so any solution, too, must be sufficiently flexible to adapt to these changes. It should also be reactive – meaning it should automatically notify its users when a portfolio is no longer compliant, for example because movements in the market have shifted the weights of individual securities, leading to set limits for individual unit classes being exceeded. A change in a rating could also suddenly make it illegal to hold certain securities. When these things happen, the investment mix must be adjusted – immediately, and not just at the next meeting.
One thing is clear: financial institutions need tools that have factored in all these elements if they wish to successfully compete in today’s market.