What’s New in Investment Monitoring and Risk Management?

Back in May of 2017, we wrote about how investment monitoring, also called investment oversight, was a gaining prominence in financial advisory services.  In the two years since that article, risk management and investment monitoring has become even more widespread.  As we said then, if you aren’t talking to your clients about investment monitoring, someone else might be.
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What is investment monitoring? It’s a kind of risk management for financial accounts and investment strategies. It blends traditional accounting oversight skills, like tax analysis, with other compliance skills, like risk assessment. Just as companies have been stockpiling compliance staff to assist in regulatory changes, so too have companies been looking to arm themselves with better information and plans to handle future events. Investment monitoring sometimes focuses on wealth preservation and tax advantages, but other times blends performance with compliance. Many companies that provide stand-alone investment monitoring services perform regular risk assessments to look for trends and tipping points. Once a pattern or trend can be assessed, those companies will move into a more aggressive monitoring of an investment.

Back in 2017, multi-dimensional companies were moving from departmental risk assessments to enterprise wide risk assessments. This moved the focus on risk from one based on hazards to identify and thwart to the overall goals of the organization and overall mission efficiency.

Since 2017, more financial advisors have seen the importance of risk management and have adopted the idea that a good offense should incorporate a solid defense. While advisors have always known to meet their fiduciary duties of prudence and diversification, they now understand that the nature of risk is nuanced and highly client determinant. Each client may have not only a different tolerance for risk, but also a different definition of what’s at stake.

Many financial advisors have also seen that as risk assessment and management has increased in its visibility in the workplace, clients now value their financial advisor’s expertise in identifying financial risks. That process may help advisors in their long-term relationships with their clients. As clients increase their knowledge of risk management, through their work, they may value a financial advisor’s intellectual capital more. Financial advisors may find that they can expand their services to clients in this area.

To be clear, investment monitoring and risk assessments aren’t the same as due diligence or ordinary prudence. The difference lays in the strategy. Every financial advisor should, to meet their ethical obligations, fully investigate an investment prior to purchasing by reviewing all relevant, available, information. A risk assessment looks towards a specific individual or company’s circumstances, their vulnerabilities and the regulatory structure involved in their investing.  

Investment monitoring should also be distinguished from risk analysis on specific investment assets. In the later, a financial advisor is comparing an assets performance to a specific goal or to the average performance of those assets. In the former, a financial advisor is looking to how the investment strategy is being managed overall, which would include the selection, monitoring and sale of all of the assets in the investment portfolio.

So while risk management may be a helpful way of thinking about investment management, it shouldn’t be confused with assessing risk (due diligence) or determining the risk of maintaining a particular investment.

In the two years since we first looked at investment monitoring, the takeaway hasn’t changed. Investment monitoring represents a potential change in how the performance of a financial advisor is viewed.  For some, performance was measured by wealth generation, fees to gains comparisons, and access or availability. Under an investment monitoring framework, a financial advisor’s performance may now be measured by performance in compliance, risk management, and communication areas.

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