Culture changes with shifts in society. Risk does as well. Thus, the perspective of the culture of risk rather than the rules of risk. This gets to the need for a flexible approach to risk, one that allows for dynamics. A culture is a bulwark for facing the surprises that emerge from the very nature of market risk. Addressing these with a common attitude and understanding.
Risk Culture Takes A Long-Term Perspective
As risk culture becomes an integral, organic part of the financial advisor process, it adopts the individual's time frame. The time frame of asset owners generally different from that of those who are investing their assets. Because of this, longer-term issues like climate change and demographics are more important that for the asset managers and hedge funds that evaluate performance in a time frame of months. And some risks that are important to these institutions amount to noise for those with a longer time frame.
Advisors and their clients now realize that stock picking and driving for alpha is more often that not a chimera. Exceptional opportunities might arise, but usually will carry proportionate risk. So the turn toward a risk focus, toward designing portfolios and evaluating investments based on market risk in the context of the client's objectives, follows as the new course for wealth management. Tools that evaluate portfolio risk are a starting point, but are most demonstrative when applied in the framework of a risk culture.
Rick Bookstaber is co-founder and head of risk at Fabric RQ.