How much does it really cost to meet allocators' risk management expectations?

Implementing a fit-for-purpose risk management and reporting function is expensive. But for asset managers, the cost of sub-standard risk capabilities is even higher.

With risk management an increasingly central focus in investor and consultant due diligence examinations, asset managers’ ability to attract allocations is ever more closely tied to their risk capabilities. The kind of cobbled together portfolio management system/Bloomberg/Excel-based set-up many smaller asset managers start out with will no longer pass muster.

What firms need is a robust, institutional-grade risk infrastructure. Implementing that in-house though requires heavy investment in technology, data and expertise – resources in short supply for many investment firms.

Risk costs

Take the human element. Firms’ starting point is a risk manager/chief risk officer responsible for overseeing all the risk processes. Salaries for people with the right experience are in the order of $250-500k or more per year.

You’ll also need a quant/risk analyst to provide modelling support, run the risk systems and produce the analytics – at a cost of $120-250k. Depending on firm size, one to three data analysts may be required to input the relevant data and keep it up-to-date ($80-120k per person). Factoring in headcount overheads such as pensions, national insurance, office costs, compliance and travel adds another $80-300k.

Then there’s the technology.

Producing the actual analytics takes a sophisticated risk engine. Asset managers rarely develop their own risk systems in-house these days, as investors and regulators prefer the validated and audited model robustness of industry-recognised third-party engines. The modelling provided by these leading risk engines is strong. Problem is the technology hasn’t evolved much in the last decade. System implementations are hard, and the front-end user experience archaic. Cost: $100-500k plus.

The risk system in turn has to be fed with large volumes of market data to generate the risk analysis. Licenses with third-party data vendors range from $50-400k p.a., depending on the type and amount of data required.

A database will then be needed to store the data and populate the risk system. And don’t forget the IT support staff to implement and maintain the technology. Think another $50-200k for that.

All in, you’re looking at $730k to $2.5 million or more – per annum.

The managed alternative

Which creates something of a catch-22. Start-ups and smaller asset managers often lack the investment dollars to dedicate to such sophisticated risk capabilities. Yet without that infrastructure, they’ll struggle to attract the capital that will enable them to grow to a size where they can afford to make the investments.

A managed service partner offers the answer.

An expert third-party provider can alleviate the pain and cost of implementing and maintaining the kind of risk analysis and reporting set-up asset managers need.

A well-run managed service will have already made the requisite investments in a sophisticated risk infrastructure (their business success depends on it after all). They’ll possess the complex risk management and technology skillsets. And they can demonstrate a proven ability to deliver timely, high-quality risk analytics that meet the institutional standards of today’s allocators – leaving the asset manager free to focus on those areas of expertise where it can add most value.

Backed by this level of support, allocations will then become a lot easier to come by.

To learn more about the importance of providing an institutional-grade risk management capability read our latest whitepaper: The True Cost of Risk for Asset Managers.