The Importance of Effective Asset Risk Management

POST by Sonia Pearson

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Asset risk management is big business these days and it’s up to each individual company to put the correct processes in place to suit their product, service, and style. Running a business that doesn’t have an adequate asset risk management system in place doesn’t just mean you could fall foul of regulators. You may also be taking unnecessary – and potentially damaging – risks to your business, investment and even people’s lives, without even knowing it.

All risks can never be fully avoided or mitigated simply because of financial and practical limitations. Therefore all organizations have to accept some level of residual risks, but it is imperative that all risks are isolated and clearly defined and managed within financial and practical constraints.R. Keith Mobley

But, understanding that asset risk management is an important part of your business is just the beginning. It is a complex part of any business and must be treated as such, in order to achieve the right balance between assessing risk and taking it.

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Effective asset risk management

An effective asset risk management process isn’t one that necessarily removes all risk from your operations – unless that is what you need to do. It is a process that systematically understands each of your company assets whether they’re a physical product, a tangible or intangible financial asset or your staff, and helps you make the right decision for your business, with all the potential risks laid bare.

Let’s start with an example of investment asset risk management. It’s an area that remains under close, scrutiny with regulation and management styles in the sector continuing to evolve and improve.

In order for an investment management firm to have an effective asset risk management system for its investment decisions it must, at the very least: be aware of all the investments currently in its funds and under its management; be aware of the funds and investments available that aren’t under its management; understand the effect different external developments – be it political, natural disasters or financial changes – can have on all of those investments (actual and potential); know the costs associated with change.

And that list isn’t even close to all the details that need to be understood, noted and continually monitored and assessed.

As well as being able to do all of those things, they need to know when to take more risk and when to take less risk with their investment clients’ money. A vast array of processes need to be created and applied in order to conduct an effective asset risk management strategy in the world of investment. The processes themselves also need to be monitored and improved where possible, as well as being transparent and easy for regulators to access and understand.

All investors seek protection

It’s not just investors who hand their cash or pensions over to qualified financiers, who want to know their money is being treated properly. Investors in a start-up, for instance, want to know how much risk the chief executive officer is willing to take and why.

When you’re employing a new member of staff it’s an assessed risk. A business needs to know as much about the person as they can; where they worked before, what their education is and why they want to work somewhere new.

For big industrial plants, effective asset risk management is essential for the safety of staff and the surrounding area. Things that must be regularly assessed for risk include where a plant is built, the machines being used and what happens if a natural resource runs dry.

The list of different assets that require effective risk management is almost endless. That means each business must find and use an asset risk management process that works for them. And that can often require an entire department dedicated to asset risk management.

Growth of the risk management industry

The asset risk management industry has grown exponentially in the past eight years or so. While much of that stems from the impact of the 2008 global financial crisis, it has spread to every industry and the assets therein.

A robust risk framework is an essential part of any business that wants longevity and success. As we said earlier, though, risk management isn’t only about removing risk completely. It is often about taking a measured approach to risk – making decisions that you know have some risk attached – but at a level you’re willing to take. After all, in many industries success is rare without taking some risk.

But, and this is essential when people’s lives are potentially at risk, you, and any managers and regulators must be able to understand the exact type of risk and why it’s acceptable at that time. This is why an effective asset risk management process is important so that each business can manage risk, know when to take the time over a decision and also in order to pinpoint when and why a risky decision was taken when looking back.

Big data and technology

The evolution of harnessing big data in emerging technology and software means the ability to monitor and assess risk is improving all the time. Of course, much of those new abilities and tech come at a cost. But, if you can find the right risk asset management system and process for your firm that also has the ability to learn or be easily adapted or upgraded, it is without a doubt, an investment that’s worth making.

The right asset risk management system doesn’t start and end with technology, though. The first step to creating and installing the correct one is understanding exactly what assets you have, how important they are and what risk, if any, you’re willing or permitted take with them.

This is part of the reason the asset risk industry has become so important and continues to grow. As recently as this month, (November 2016) the Hong Kong Securities and Futures Commission has issued its latest regulatory update on asset management. It’s a constantly evolving process, not just in the financial services industry, but everywhere. Why? Because better management is craved and available through technological improvement, as well as investors and government’s desire to achieve a better return and improve safety records.

The energy sector is also under pressure to perform better, with asset risk management coming under fire here too. Again, it’s a return on investment but it’s not just financial. The green performance – and future – of energy firms are also being scrutinized.

The steady, but ongoing success of the Paris agreement for climate change, ensures the energy sector, in particular, must have a fully functioning asset risk management process in place. One that can identify the risks of climate change, how long it will take and how expensive it will be, to achieve the standards required to meet new, incoming rules and regulations. And, what the consequences will be for not achieving those new standards.

Crossing regulators, a risk worth taking?

Regulators across all industries have become more demanding and are watching more closely than ever. While they are a customer’s final port of all if they’re unhappy, they work to ensure each firm bears the final responsibility for any wrongdoing, particularly where risk is involved.

Because of this, and in order to do your best not to fall foul of your specific regulator, investment in asset risk management is essential. It doesn’t have to be a huge investment, but it has to be one that will allow your business to put the right asset risk management system in place. A system or process that helps you avoid taking too much risk and damaging your business, investment, reputation and other people’s lives.

Not adhering to a regulators’ rules is something most businesses would rather avoid. But, there are worse consequences of not having an effective asset risk management process in place than upsetting regulators, and those are the ones to be avoided at all costs.

Photos by stevepb

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