How To Avoid Risk In Your Practice
In your financial services practice, both your company and you, personally, are exposed to risk every day. Some of those risks are the same as those faced by every small business, but some are unique to the financial services industry. In all cases, understanding the risks and the potential for losses keeps you one step ahead. Minimizing risk should be one of your key strategic goals as you plan the future of your business.

SEE: Identifying And Managing Business Risks

Financial Risk
Every business faces the risk of loss of profits due to many unexpected factors, such as high expenses, lower than expected revenues or physical catastrophe. Suffering unexpected losses can jeopardize your ability to hire or retain staff, pay taxes on time or even keep your office doors open.

The first way to minimize the risk is to be aware of it. Keep your accounting records up to date and watch for significant variations from budget. Spend time, at least quarterly, on strategic planning and find ways to widen your client base so that you are not financially reliant on any particular client.

Compliance Changes
Every advisor who plans an investment strategy for a client must consider tax and regulatory issues. Investment plans often incorporate tax advantages put into place by the federal or state government in order to encourage investing. The danger arises if tax or regulatory laws change and clients are financially damaged by the changes. Even if you are not held legally responsible, such a situation may damage your reputation.


Keeping that risk to a minimum means staying on top of tax law and researching the effects of planned changes to your clients' portfolios. It should go without saying that you should structure your clients' strategies on sound investment principles, rather than trying to exploit the latest tax loopholes.

SEE: Get A Job In Compliance

Expectational Risk

As a professional advisor, you must follow SEC and other federal and state regulations in your dealings with clients. Many individual clients, however, do not necessarily understand your role in their investments. This can lead to clients believing that you are providing services that you are not, or that you are constantly monitoring their portfolios for them. Misunderstandings in this area can result in litigation and damage to your reputation.
In order to ensure that your clients are on the same page with you, draft an engagement letter that clearly outlines your services and have clients sign it.

Market Risk
The portfolios you manage on behalf of your clients - as well as your own - are subject to the ups and downs of the investment markets. The strategies you have in place for your clients are partially dependent on whether a bull or bear market exists; however, sometimes drastic changes happen in a very short time, such as the Black Monday crash in 1987, when the Dow Jones dropped by almost 23%.


A major market downturn can significantly affect your revenues. If you charge an asset-based management fee, your revenues will drop with the market. If you charge an hourly advisement fee, you may find that fewer investors are either entering the market or being active in it. While there is little you can do about massive market swings, you can spend time ensuring that your portfolio strategy includes defensive strategies to mitigate the impact of market crashes.

SEE: Calculating Risk And Reward

Data Security
You have access to significant financial and other sensitive information about your clients; they expect you to maintain confidentiality and protect their information. A security breach can land you in legal hot water and can destroy the reputation you have built. If you are not sure how to beef up the security around your clients' data, meet with a data security expert to learn how to properly handle and store confidential information.

The Bottom Line
It is impossible to protect you and your company against all risks, but you can minimize them through proper planning. Being aware of potential risk pot holes, before you hit them, can keep you on the right road.






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