Risk Management in Asset Management

Erik Mills blog author Erik Mills
2 min read
asset risk management
#Investment news

Through daily operations, companies accumulate assets and manage liabilities—it’s inevitable, especially for well-established businesses.

Risk factors need to be managed properly for a business to thrive. Though risk and asset management are at opposite sides of the spectrum, they are correlated and interconnected. 

A well-managed asset can mitigate the risk of loss in business. Proper risk management can also lead to better asset management. 

In this text, we shall look at them individually to see how they parallel each other, so let’s dive right in.

What is risk management?

Risk management is the systematic process of identifying, analyzing, and managing threats or potential threats to the assets, capital, and earnings of a company.

Essentially, it’s the process of devising ways to ensure that the financial and material assets of a company are not exposed to the risk of damage by either internal or external factors. These risks can range from legal liabilities, accidents, and slight technical errors to managerial mistakes and financial uncertainty.

What is asset management? 

Asset management, also called portfolio management, is, at the fundamental level, managing a client’s finances and investments. Going forward, it’s the management of a client’s investment portfolio by a third-party financial institution or an investment expert. By its very nature, one can’t successfully manage his own assets, it has to be done by an external institution. 

Usually, asset management is a service demanded by top corporations with a large asset base and not for budding businesses which might just need an investment counselor.

The difference between risk management and asset management

It’s sometimes difficult to distinguish asset management from risk management because both are geared towards a common goal — securing assets (financial or material) of a company from potential threats that can lead to losses.

However, one is managing, and the other is doing the security job full-time. While risk management is at its core, identifying and managing threats to the financial investments and assets of a company, asset management is managing a client’s investment. The asset manager scouts for profitable investments by analyzing market trends and knowing when the time is ripe for his client to invest. The asset manager tries to ensure that their client is investing in fertile grounds that will yield profits, not losses.

In asset management, the financial goals of a client and manager are shared to help ensure that those goals are achieved. It involves proper management of investment portfolios and recommendations of viable sources of massive profits.

Trends and risk management tips 

Marrying risk and asset management is a developing trend, and so we now have asset risk management experts. If you look at asset management from a broader view, you’ll observe that risk management is part of asset management. When an asset manager saves a client from investing in a potentially poor investment, one risk is successfully averted. That’s risk management. 

The intensive management of a company’s financial assets and investment portfolios can successfully curb risks, so from a broader perspective, asset risk management is inseparable. 

Another trend is including risk management as part of the job description for asset managers. 

With an unstable global economy growing by the day, managing assets requires mitigating risk to avoid managing a portfolio at the risk of losing much of its value due to natural, external economic factors.

The fusion becoming more practical 

If you look at the risk management industry, you will discover that it includes asset security. Managing risk involves securing assets — they are virtually inseparable. 

Hence the fusion between risk and asset management is increasingly becoming actionable. Asset managers are deploying risk management strategies continually in their arsenal of management tools. 

In one study, a Boston Consulting Group focused on risk management in the asset management industry showed that asset managers are taking risk ever more seriously. The agenda was to incorporate risk management completely into asset management. Some of the tools being used by asset managers in the course of handling risk include:

  • Delegating a management team for risk
  • Strategically creating excellent governance processes
  • Clearly defining risk-management processes
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