The Wealth Mosaic Talks To Daryl Roxburgh of BITA Risk about Better Controls & Management Processes

For this issue of The Wealth Mosaic Talks To (TWMTT), we talked to Daryl Roxburgh, President and Global Head of BITA Risk ^®, part of the corfinancial^® group and asked him to share his view on why, in today’s market, investment managers and firms need to consider dispersion of returns and evidencing the broader benefit they deliver to their clients in terms of overall value. 

Before we start, could you share a bit more about yourself and your career to date?
I’m head of BITA Risk. I started my career as a private client fund manager, before taking up managerial roles in Credit Suisse in the nineties. I then spent two years at M&G, before I was recruited by Prudential Portfolio Managers as Global Head of IT in 1998. My expertise lies in portfolio construction, analytics and risk solutions for the quantitative, wealth management, and private banking markets.

What are the current issues, generally, that wealth management firms face around control and insight?
Wealth management firms today know that the FCA is likely to become far more prescriptive in its demands; it is looking to see that customers are not being exposed to inappropriately high-risk or complex instruments in the investments that they make while having consistent returns and fair value.

That means that firms must be able to demonstrate a daily understanding of where portfolios are relative to their mandate. To do this effectively, wealth managers need sophisticated and effective controls, and a greater level of management information in place. Having these controls in place will keep them more informed and aware of the level and sources of potential risk in a client’s investment portfolio – foreseeable harms – as well as returns-outcomes.

To efficiently manage a book of client portfolios, managers need an exception-based dashboard which gives them the ability to hone in on any areas that need immediate attention.

Why is this an issue now?
The FCA is constantly discussing the need to prevent consumers from being sold or recommended products and services that are of poor value, and is consistently advocating the need for wealth management firms to shift to an investment model that is built on best practice and evidence based. As a result, wealth managers are introducing more robust monitoring systems to spot issues, evidence that they are treating their customers well, and are firmly focused on delivering on the best possible all-round outcome to their clients.

How can firms best address this issue on a high level?
I think value can be measured in a number of different ways, in terms of meeting the clients’ objectives for risk and return. For example, a fund manager does not need to be constantly turning over a client portfolio to add value. But they do need to be continually assessing whether the portfolio’s components are the right ones and are in line with the defined investment mandate – that means carrying out the right level of oversight and review on a systematic basis. The fund manager’s focus very much needs to be on anticipating foreseeable harm and increasing standards overall as well as performance dispersion.

What would this look like at a granular level?
Firms need to break down the causes of performance dispersion to understand the risks inherent in the portfolio. They also need the means to manage and resolve risk and foreseeable harm-related issues. This implies a governance structure that is effective, non-conflicted, and with appropriate controls in place to steer a course back to the provision of best outcomes and customer value, when and where needed. It also means testing consumer understanding and ensuring they fully understand all aspects of their investment products and services. This can be done only if the portfolio manager clearly understands the customer’s needs, risk profile, and circumstances – including whether they are deemed vulnerable or not, according to the FCA’s definition of vulnerability.

Most firms are already focused on reducing harm and increasing their standards of service, but others are still playing catch up purely because they have a culture where they have, in the past, given their investment managers a lot of freedom with limited control frameworks or structures in place. They ae now obliged to apply something more robust than they have done in the past in terms of risk analysis and controls.

How does this feed into fair value and Consumer Duty?
Providing fair value means the amount paid by customers is reasonable relative to the benefits they realise from their investments. The investment manager must also ensure they deliver ongoing review/advice and do not overtrade, provide clear disclosures on fees and charges, deliver overall value to the customer and, finally, make required changes if and when issues around poor value are identified.

The aim is for wealth managers to have a circular process of defining the investment outcome their client expects, putting controls in to monitor progress against that outcome, and then analysing whether they achieve that outcome.

In this context, outcome management is an ongoing and iterative process; it does not look at the portfolio only at the end of a given year and says it is slightly below the expected return. Rather, an ongoing process that is focused on outcome management is more about monitoring a portfolio against various measures throughout the year to ensure that investment targets are met by the end of a given year.

For those investment managers who choose stocks on a fundamental analysis basis, quantitative methods and metrics, such as risk, will bring additional insight to their process. So I think this is now about having alerts and prompts in place to look at a portfolio such that the investment manager has a comprehensive and informed view of the underlying risks, and is comfortable taking calculated risks because they are aware and informed of when and where intervention might be needed to maintain a focus on consistently providing fair value to their client.