The newly released Risk Principles for Asset Managers contain many important elements for serving as a basic checklist for firms to assess their risk management. But they fail to encompass some significant aspects that have created problems for some managers and clients.
The set of principles, designed for traditional investment management firms. was created by the Buy-Side Risk Forum, comprised of top risk management executives at some of those firms. The 27-page document covers risk in investment, operations and governance.
Ideally the principles should serve as a useful tool for the industry, as well as provide instruction for investors to better understand risk issues they should employ to help evaluate their asset managers.
The principles resonated with some emphatic ideals that the forum recommends be committed to practice, These include creating an internal culture in which understanding and managing risk is everyone's responsibility and that the incorporation of a fiduciary mindset into a firm's culture is itself risk control.
With these points in mind, the principles need to add explicit recommendations on dealing with conflicts of interests. This issue includes marketing and business development, the use of directed brokerage or soft dollars, best execution, and relationships with brokerage firms and consulting firms, both often gatekeepers for pension fund executives. The guidelines should recommend full disclosure on these matters so clients can make fully informed decisions in their dealings with asset managers.
Until these aspects are addressed, the principles fall short of being comprehensive in usefulness. Their architects need to expand the blueprints.