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The Role Of Technology In Enterprise Risk Management - White Paper

Eliane Chavagnon

12 December 2013

Wealth management firms can improve their enterprise risk management practices - one of the most talked about and complex areas in the sector today - by outsourcing their various technology systems to a single provider, SEI said in a new white paper. 

The firm highlights in Risk Management—A Strategy for Success that many wealth management firms operate on up to 50 legacy systems with various data sources and, crucially, limited integration between them. But when information is housed in a single location, firms can better report on and analyze business trends throughout the organization, it said.

Enterprise risk management, or ERM, relates to the processes used by firms to identify and address the various risks they face. Essentially, ERM provides a “mechanism” for identifying which risks represent opportunities and which may lead to potential pitfalls, according to PricewaterhouseCoopers. believes that outsourcing is just one avenue wealth management firms should consider when looking to enhance their ERM practices.

Al Chiaradonna, senior vice president, SEI Wealth Platform, told Family Wealth Report that the biggest risk pressures facing the wealth management industry today boil down to two things: operational risk and reputational risk.   

“Investors and regulators have much higher expectations of wealth management providers than ever before when it comes to the quality of their infrastructures and the transparency they provide around their operations. There is a demand for institutional-quality in the retail space and if there is a breakdown or a perceived breakdown in infrastructure or processes it can be devastating to a provider,” Chiaradonna said.

But crucially, it is when trying to navigate between disparate pieces of technology that regulatory and compliance issues arise. As SEI stated in the paper: “Risk is often equated with regulatory reform; complying with legislation such as Dodd-Frank, the Bank Secrecy Act and the Anti-Money Laundering Act is a constant challenge to wealth management firms.”


The firm acknowledged that, given the sensitive nature of wealth management, outsourcing is not a decision that “should be made lightly.” Indeed, there continues to be debate about what is the most efficient approach wealth management firms should take in handling issues related to technology upgrades and replacements, particularly when sensitive client data is at stake. 

On the other hand, the issue is important at a time when regulators, for example, increasingly expect management teams to prove that they are “fully aware of their total exposure,” SEI said. And it’s not just regulators; shareholders, employees and clients – for varying reasons – are also demanding it, the firm added.

“The financial crisis of 2008 created a seismic shift in the industry among regulators, among investors, among providers for that matter. Risk mitigation has become so prevalent that in many cases it trumps performance,” Chiaradonna told this publication. “It’s become a major factor, and in some cases the primary factor, in evaluating investment managers and wealth management providers in general.”

SEI believes that a single platform leads to better management information. On a unified platform, for example, chief executives, chief operating officers, risk and compliance officers, and chief investment officers, etc, can better asses how their business is operating and how exposed it might be, the firm said.

Another point relates to the costs associated with implementing and maintaining a more advanced risk management practice. However, SEI believes that this additional expense can really boost long-term business growth.

Making the move

SEI emphasized that due diligence is “critical” before making the move to partner with an outsourcing provider.

“A firm should explore the potential outsourcer’s ERM governance, which should include extensive programs around disaster recovery and business continuity, information security, and third-party vendor management practices,” it said.

Meanwhile, Chiaradonna, added: “you look at track record.”

He explained: “It’s not just where someone is today but whether or not they demonstrated an ability to innovate and be a leader over the long haul. That means they continually invest in technology, in talent and all the other resources it takes to be ahead of the curve. And one thing I’ve learned over so many years is that culture counts. It not only about technology or processes, it’s about feeling a synergy with the people you’re going to working with as a partner.”

On a final note: While SEI believes that, by outsourcing to a single provider, risk is reduced, it could also be argued that relying on a single relationship is riskier than diversification due to the “eggs in one basket” notion.

“The reality is a single provider eliminates confusion and creates accountability. The concept of provider diversification sounds good until an issue arises and everyone is pointing the finger at someone else,” Chiaradonna said.

“Additionally, a strategic partnership with a single provider allows a firm to leverage the provider’s investment in programs such as business continuity, information security, and vendor management. It’s been proven that a single-source outsourcing provider creates greater accountability, greater efficiencies and in many cases greater cost savings,” he added.