A good risk management strategy is the key to success. It helps you become more effective, align your efforts with clients’ expectations, and avoid misplacing their funds. What should you include in such a strategy? How to manage risk effectively? Read this article to learn more!
What Risk Management Strategies Are Effective? Our 7 Tips
Let’s look at the main risk management strategies and tips we have prepared for you. What will prove useful and help you avoid misplaced investments?
Diversify
The first tip is quite general, and you probably know it, but we still have to include it in our guide. To manage risk effectively, you need to diversify your investments. Make sure that they are diverse across different categories, namely:
- types of assets,
- sectors and industries,
- geographical locations.
This way, you will be protected against risk stemming from certain markets or industries (for instance, caused by quickly developed new legislation on a given industry in a particular country).
Invest in Effective Analytical tools for Wealth Management
Technological developments enable you to calculate and predict risks more effectively. With the use of AI trained on high-quality historical data, you can analyze your potential investments in a matter of seconds and select those that match the client’s preferences. It’s accurate, quick, and user-friendly.
This is why we implemented a risk management module into our wealth management platform. While it will analyze your data and calculate the risk for you, remember that you are in the driver’s seat—the final decision is still up to you, and technology, although helpful, will not replace other risk management strategies from our list.
Review the Portfolios Regularly
Another crucial risk management tip that we have for you is to review client portfolios regularly. This will enable you to spot any new risks and react on time before they result in consequences.
For this to happen, you must have a complete portfolio overview. Our WealthArc platform is equipped with an automated portfolio consolidation module that lets you analyze all the investments at once and spot potential risks easily.
Stop-loss Orders
Stop-loss orders can often feel like a lose-lose risk management strategy for wealth managers. After all, this approach defines the lowest value point for an investment at which you sell the assets. Negative as it may seem (you would probably prefer other strategies), you should consider adopting it.
Embracing this approach does not cost you a cent—you can always set the price level low enough to give it time to bounce back in cases of temporary value loss. Yet, in the long term, this strategy can stop your client from suffering major losses—it is better to implement it anyway, even if your investments should never reach the stop-loss point.
Conduct Thorough Research (Due Diligence)
Sometimes, the risks are not directly linked to the market but rather to particular investments. For instance, if your client prefers sustainable investments, you are susceptible to ESG investing greenwashing.
In such cases, the only strategy that will help you reduce the risk is a proper investigation. The more you know about given assets, the more accurately you can estimate the risk. Thus, collect as much information as possible.
Form a Partnership with Other Experts
Suppose you don’t specialize in a particular field and don’t work in a family office, bank, or a large wealth management firm. In that case, we recommend networking and partnering with other experts who also operate in wealth management but specialize in different key areas. This way, you will be able to exchange knowledge or even recommend each other to your clients. Why is it important?
If you are not an expert in, for example, foreign real estate investments, you are less likely to spot potential risk. But if you are in a partnership, you may consult your colleagues to ensure that you (and your client) are fully aware of the threats and opportunities of a given asset.
Hedging
Hedging is a financial strategy employed to minimize or manage the risk of potential losses in an investment portfolio. By using financial instruments like options, futures contracts, and swaps, investors can offset the impact of unfavorable price movements in the assets they hold. Essentially, hedging acts as a form of insurance, providing a buffer against market volatility and reducing exposure to unpredictable shifts in asset prices.
While hedging strategies can sometimes be intricate and require careful planning, they effectively manage risk, preserve portfolio value, and ensure that an investor's financial goals are more securely achieved. When done correctly, hedging helps balance risk and reward, potentially safeguarding the portfolio from major setbacks while allowing growth opportunities.
The Takeaway
The above are our 7 practical risk management tips and strategies. Follow them, and you can estimate risks more effectively and prevent them from affecting your client portfolio. Do not rely just on one or two of them—it takes a combination of at least a few of them to secure your investments from potential threats and losses.
Did you like this article? You may also read: What is ERM and Why Is It Important For Your Family Office?
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