The Power of Feedback Loops: Fostering an Environment that Supports a Healthy ERM Program

Steve_TaylorGuest Contributor: Stephen Taylor, Senior Market Manager, U.S. Enterprise Risk & Compliance, Wolters Kluwer Financial Services

In the wake of the financial crisis, strategies for managing enterprise risk have taken center stage of organizational decision making and many institutions have revamped their entire approach to understanding the nature of the risks they face and how to mitigate against them. A sophisticated approach to managing risk is a continual process of systematically assessing, measuring, monitoring and managing risks in an organization. Moreover, it ensures that the “big picture” is not lost to the daily demands of running a business.

One of the best ways for an organization to accomplish this is through establishing a risk management “feedback loop” to continually assess whether the assumed risk is reasonable and appropriate, or whether the situation should be reassessed. Feedback loops are effective tools for positively impacting and changing risk behavior, since they allow the institutions to address minor issues at the lowest level and empower business lines to self-correct—while keeping the focus of the executive team on more high-level business concerns.

Increasingly, boards and senior executives are looking to develop effective key risk indicators (KRIs) to drive success in their ERM process and improve the execution of the organization’s strategy while pushing responsibility and accountability into the front-line business units. These KRIs serve as a type of feedback loop, providing organizations with an early warning sign of increasing risk exposure in various areas of the enterprise.

Getting visibility into specific regulatory rule changes alone isn’t enough, for example. Firms have to be able to pull this information through the business and clearly demonstrate to shareholders, investors and regulators that relevant action has been taken. The ultimate verification is that controls have been put in place to mitigate any potential risk and that these controls have been positively tested.

This is what we think of as a “virtuous circle” of effective risk management and it is critical to success. In order for it to work, however, there has to be the right “tone at the top.”

For a true risk management culture to take hold within a financial services organization, there must be a pervasive philosophy communicated from top management down through the organization and embraced by staff. Every employee must understand the organization’s risk appetite and where the “edges of the envelope” are for each business line, product and geographic unit. Front-line managers must buy into the risk appetite, and operate under it, for the risk culture to be effectively implemented.

As a rule, KRIs should be monitored closer to the “front” than in the higher reaches of management. It is important to establish a good working relationship between the risk management function and the business units, so that employees view risk managers as making a positive contribution—rather than just someone who enforces the rules. Instead of relying on the risk function to manage risk, financial institutions need to hold accountable and empower the front-line managers to make decisions in a more risk-aware way.

The best ERM practice has business managers, profit centers, business units and functional heads assume full responsibility and accountability for the risks they take.

Senior management and boards of directors do not need to know, nor are they necessarily in a position to fully appreciate, all KRIs employed within the organization, but they should be expected to understand and be kept updated on KRIs related to the organization’s top risk exposures.

Having the right culture for compliance is crucial and this can be improved if it’s demonstrated that effective compliance is not to be seen as an ineffective cost center, but as a way of running an ethical business which not only can improve the strategic direction of the organization but can improve the firm’s reputation within the market.


Learn more from Wolters Kluwer on October 16th, when they sponsor FTF’s CAPCon New York conference. Stevie D. Conlon, Senior Director and Tax Counsel for Wolters Kluwer will lead a discussion on new corporate action burdens under FATCA.  View the full events agenda online here.


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Insurance and Innovation: Are you In or Out?

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Guest Contributor: Sheryl Brown, Social Media Coordinator, Ash Brokerage

So when you say “financial services” or “insurance” do you immediately think of the word “innovation”? Um … likely not. (Hint: We are not the cool kids on the bus. I hate to break it to you this way.) Why is that? Why, as a group of professionals, are we so far behind in being radically different? What are we scared will happen?

I recently polled all of my friends on Facebook (Hey, I have 500 friends on Facebook, so the poll has a little depth to it … #TongueInCheek). I simply asked them what came to mind when they heard “financial services” and “insurance.” Some of the responses were:

- Medical needs
– Death
– Pushy sales people

Oh my. That’s not very innovative stuff, is it? But wait … there’s more.

How do we describe what we do? What kinds of words SHOULD we be using with our family, friends, clients and businesses so we can change these thoughts? Who should we be talking to about these things?

I believe we need to create a fundamental shift by using the term “community” instead of “industry.” Industries produce widgets. What exactly are we producing? Yeah, yeah … you could say the policy is the widget, but it’s not the same.

Jean Vanier is quoted as saying, “Every human activity can be put at the service of the divine and of love. We should all exercise our gift to build community.” Think about that for a moment. We are a relationship-based business. That’s what communities are built on … relationships. As a community of financial professionals, we provide peace of mind to our family, friends, clients and businesses. I don’t think I remember anyone saying this about coffee, tennis rackets or pallets, do you? Those are widgets from industries … we are a community.

When you sit down with someone, are you still using outdated words like protection (blech), policy (you mean there are rules?) and premium (I get the best!)? Well stop that now! If you think our family, friends, clients and businesses are hearing these words in the way we THINK we are describing them, you’re dead wrong. I challenge you to read Maria Ferrante-Schepis’ book, “Flirting with the Uninterested” from Maddock Douglas and see what you think. WARNING: After reading this book you, might start thinking about your business very differently. I cannot be held responsible for the increase in business you may start to experience.

Who you are talking to is a big deal too … a really big deal! Are you talking to everyone about what you do? Specific people? How do they hear what you are saying? Start considering this today because it matters. If you’re talking about IRR, COI and WOP, they may be thinking OMG!

Encourage your clients to stop you when you go into jargon mode. We are all guilty of this in the financial services community. I’ve done it and you are doing it today. Instead, challenge yourself to talk to everyone differently. Lose all the lingo and listen from your clients’ perspective. Better yet, find someone who knows NOTHING about what you do and start describing things to them. You’ll be amazed at how many times they raise their hand and say, “I dunno what you’re talking about right now.”

Sure, I can give you all the social media advice to help you ramp up and start exploring a new world and way of doing business, but none of this will work unless you’re innovating and doing business differently. Can you commit to getting comfortable with being uncomfortable?

Are you innovative or out?

Hear more from Sheryl and other social media directors at FTF’s annual SMAC Conference in New York on September 18th, 2014! Check out the agenda and speaker line-up at FTF News.

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Utilizing Big Data in the Financial Markets

Larissa J Miller HeadshotGuest Contributor: Larissa J. Miller, Founder and Board Member of Stuart Investments

The financial markets have always been blessed with big data. While other industries are catching up to the markets in terms of size, the financial markets have moved on to the incorporation of the data to existing models, learning models and strategic decision making at both the corporate level and the trading level. Since stepping into the modeling world in 2004, I have seen the markets evolve in terms of both technology and sophistication. Model development has been streamlined by the advancement in programming languages such as R through industry developed packages allowing for programmers to quickly develop prototypes. The level of sophistication of the models has increased by our gained knowledge through the various financial crises in the last decade as well as our deeper incorporation of probability and statistical modeling techniques.

The credit crisis of 2008 changed the viewpoint of the entire industry how to properly model fixed income products. During this time existing modeling standards and assumptions were challenged as past behavior did not indicate future behavior in terms of pre-payments as well as default rates. Prior to the crash many credit analysts were able to use a standard hazard rate which was applied to every customer in a given pool or asset class. This rate described the industry standard on what percentage of the population of the pool would either pre-pay their loan or default on their loan.

The industry has moved away from applying a single rate to the entire group. Rather models are now developed to predict exactly which loan will be either pre-paid or defaulted. Firms within the financial markets benefit from understanding which of the pooled loans to either enhance profits as well as to mitigate risks. The firms enhance profits by building better relationships with their customers. The firm is given an opportunity to proactively keep their customers by working with them to prevent loan pre-payment. This is particularly helpful when the customer has a loan of several millions of dollars. On the other hand, the firm also has the opportunity to work with a customer before a default on the loan occurs. This helps prevent further write-off’s from the balance sheet. Modelers are incorporating more sophisticated modeling techniques into these models by using existing collected loan data from past loans and then generating logistic function factor models. The logistic function allows for the classification of the intensity or sensitivity to the factor in question.

Traders also have the opportunity to enhance their trading profit and loss through the incorporation of more sophisticated statistical modeling techniques. Research has been developed incorporating Markov regime switching algorithms into the trading model. Incorporating the Markov technique allows for the trader to generate a probability matrix of the state of the economy. Traders have ability to determine the number of states in the economy, typically two (a bull state or a bear state). The probability matrix then tells the trader what the probability of the economy being in either state. The information can then be fed into a trading model with different weights based on the probabilities generated by the matrix.

The advancement in both technology and sophistication has lead to better model building causing a better understanding of the risk of the trading world.


Larissa Miller was a featured panelist speaker at FTF’s DerivOps Chicago conference this past April 2014.   FTF is currently planning for DerivOps New York on November 6, 2015.  This event will bring updates on OTC regulatory reforms and manual processes, SEF platforms, global perspective on reporting requirements, trade clearing rules, EMIR and global collateral management.  Learn more about this event online here.

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Information Technology Responsibility for Social Media

Blair_headshotGuest Contributor: Blair Rugh, Chief Compliance Officer, Temenos

Social media and other forms of electronic communication are becoming the principal advertising and marketing tools of many financial institutions. First, they are inexpensive. Second, they can be targeted as narrowly or broadly as the bank wishes. Finally, the readership percentage is pretty high compared to print advertising. Almost every bank has a website. Because bankers like to be liked, many banks have a Facebook page. Some also use Twitter to get their marketing messages out. While advertising and marketing are generally the responsibility of the institution’s advertising department, the information technology department has responsibilities as well.

First, who has the authority to make changes to the bankʼs website or to post information on the bankʼs Facebook page or send a tweet? We strongly recommend that each bank should have a procedure, whereby regardless of who initiates the communication, it should be approved first by the bankʼs advertising department, then by the bankʼs compliance officer and then it should be executed by the information technology department. We recommend that there be signed check-offs at each stage of the process.

Second, because whatever the bank publishes is advertising, there are record retention requirements. It should be the responsibility of the IT department to make and retain screen shots of each page of a bankʼs website and whenever a change is made to it, a screenshot of the change noted with the date the change was made. Likewise, there should be a screenshot of anything posted on the bankʼs website along with the date it was posted and the same for any tweet. Most bankʼs do not use mass emails for marketing, but if your bank does, a copy of each email together with the date and list of recipients must be retained. The retention period for all advertising is two years.

By allowing only the IT department to post or change information, it has a record of everything that was done and everything that must be retained.

The final problem is the bankʼs employees, particularly those pesky loan officers. If any employee of the bank is using social media to advertise, his or her services or bank products, that is likewise advertising for the bank. It falls under all of the advertising rules as well as the record retention requirements. If bank employees are using social media, again there should be a procedure for the approval of what they are posting.
Also, someone needs to check periodically to make sure that they are following the rules. The IT department should have a list of all employees that have a Facebook page, and they should periodically check to see that nothing is being posted that is inappropriate and that records are being maintained of anything that applies to the bank. Likewise, if employees are sending tweets those need to be reviewed and retained. The best way to accomplish all of this is to make the IT department the pointy end of the funnel through which everything must pass.


Learn more from Temenos at SMAC New York, FTF’s annual social media and compliance conference on September 18th. Temenos will be joining a panel on the social media platforms and related technologies that are on the horizon, new regulations that may be on the way, and the major trends for the next year.

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Get Busy Living [Digitally], or Get Busy Dying

VictorGaxiola HS BIO June2014Guest Contributor: Victor Gaxiola, Customer Advocacy Manager, Hearsay Social

Anyone familiar with the movie “The Shawshank Redemption” will remember the line, “Get busy living or get busy dying.” It kept echoing in my head as I read the annual World Wealth Report released by Capgemini and RBC Wealth Management and thought about our digital world. This report has long been considered an industry benchmark for tracking high-net worth individuals (HNWIs), their wealth, and the global and economic conditions that drive change in the Wealth Management Industry, but this report in particular should serve as a major wake up call for advisors and their firms that the “big” money has gone digital.

According to the survey, over one-half of respondents claim that all or most wealth management is digital and nearly two-thirds of clients with at least $1 Million or more in investable assets expect to manage some of their wealth digitally in the next five years. The fast-paced advances in technology have affected all levels of investors and consumers and their behavior when it comes to the purchase of products and services and the need for information.  We have become conditioned to expect access to services and information on a 24/7 cycle– and financial resources are not immune to this expectation.  In addition, the high rate of acceptance of digital channels by HNWIs, illustrated in the report, shatters a couple of long-held beliefs about the use of digital services in wealth management — namely that they are not being used.

As a result, advisor and firms that have yet to adopt a digital or social strategy are at risk of falling behind, not being part of the conversation, and at worst, losing clients in the process. According to the report, two-thirds of HNWIs would consider leaving their wealth management firm if an integrated and consistent client experience across all channels was not provided. To avoid the risk of losing both assets and potentially their best talent, firms need to adopt a transformative mindset that embraces the use of technology to interact with clients and improve the digital experience.  Although nothing will replace the personal one-to-one relationship that clients have with their advisor, digital connectivity for access to information and content will continue to grow as tools for distribution improve.

Although social continues to be a risk and challenge for many firms, the greater risk is doing nothing and being left behind as the industry evolves. Social works, and studies in the U.S. have shown that 49% of wealth managers have acquired new clients through social media, of those, 29% brought in $1 million or more in financial assets.

Without a digital strategy, it will be very challenging for firms to attract new talent to support the growing wealth needs of investors under 40 who are leading the way in the use of emerging mobile applications, video, and social channels.  Among the under-40 HNWIs, 40% cite social media as important for accessing information, 36% for engaging with wealth managers and firms, and 34% for executing transactions.

With the high volume of wealth transfer expected in the next two decades, this is too large of an opportunity for any advisor or firm to ignore.  So, get busy living digitally, or get busy dying.

Read the entire Annual Wealth Report at


Learn more from Hearsay Social at SMAC New York, FTF’s annual social media and compliance conference on September 18th. Hearsay Social will be presenting a Keynote Address on The Next Digital Frontier for Financial Services: Amplifying Brand and Growing Business on Social.

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Financial Advisors: Don’t Forget The Next Generation

Theresa_Daneman_Socialware.jpgGuest Contributor: Theresa Daneman, Social Business Specialist, Socialware

Every great advisor knows that forming a solid relationship with clients is critical in order to effectively build investment portfolios strategically around personal goals such as saving for retirement, the purchase of a new house, or perhaps, even a vacation home. But all too often, advisors stop their relationship building efforts at the direct client level and fail to get to know their client’s most important asset: their family and in particular, their children.

As most know, we’re in the midst of the greatest transfer of wealth in history from “The Greatest Generation” to baby boomers. However, what’s often overlooked is the total value being transferred pales in comparison to estimated $12 trillion that will be transferred from baby boomers to Gen X/Yers over the next 30 years. Research shows most high-wealth individuals want family members to have a relationship with their financial advisor, however only “4 out of 10 advisors seek to develop relationships with client’s children from the onset,” according to LifeHealthPro. Even more surprising, “less than 14 percent of millionaires indicate their financial advisors have asked to speak or meet with their family,” according to Millionaire Corner.

Bridging the Generational Gap

But where should advisors start when trying to build trust and awareness with a clients’ family? After the initial introduction, social networks are a fantastic and largely untapped opportunity to bridge the gap between generations and begin to foster direct relationships. Given that boomers and Gen X/Yers (the next wave of clients) are the two fastest growing demographics across social networks, major networks like LinkedIn, Facebook and Twitter offer a direct line to extended family without the social awkwardness of attempting to strike up financial conversation by phone with someone who may or may not be receptive to it. By building family connections via social media, advisors also have the opportunity to convey their unique value and expertise before engaging the clients’ family directly, building trust and familiarity while gaining valuable insights about the family as well. For example, an advisor may notice on Facebook that a member of her clients’ extended family in the process of selling a house, starting a new job or sending a child to college. With social networks becoming the most popular form of keeping in touch, these “life events” are commonly the times contacts are most receptive to receiving financial advice or other resources to help with these decisions.

As you know, social networks are about nurturing and adding value to existing relationships. So the next time you log into your Facebook account, pay attention to what your clients post on their news feed. Has your client’s son recently graduated college and started his first job? Perhaps this could be an opportunity to offer to meet and help him decide how to set up a retirement account early or consult on how to maximize contributions to his employer’s 401(k) program. Maybe another client is expecting their first grandchild. This could be an opportunity to reach out to share a congratulatory note and offer to meet with the parents-to-be to discuss college savings account options.

It may be one of the most obvious ways to steadily grow a client base, however it’s clear that most advisors often miss the opportunity to form a strong connection with the next generation of clients, who more often than not, happen to be the children of their existing clients. In most cases, these individuals’ personal wealth is a small fraction of their parents’ net worth; however, many will achieve that level on their own or through inheritance and will likely form an idea about their financial advisement needs before this transfer occurs.

So remember: it’s important to serve as a trusted advisor to your clients – just don’t forget to also invest in those most important to them along the way. And when it comes to interacting with clients and their family members on social media, being authentic and offering informative, relevant content tailored to their unique needs goes a long way. Take care of customers (and their families), provide them value and education, and the revenue will take care of itself.

Socialware will be speaking at FTF’s SMAC New York conference this September 18th on the topic “Apps, Likes, and Tweets: Social Media for Your Firm.” This panel will review the variety of social media platforms being used by financial institutions and what platforms are the next big thing, particularly “SoMo,” or social mobile technology.


Theresa Daneman is a Social Media Specialist for Socialware where she draws from her 15+ years of experience as a licensed financial advisor to help customers successfully use social media to build and maintain their financial practices.

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Preparing for a Regulatory Exam: Tips and Guidelines

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Guest contributor: Jimmy Douglas, Director of Alliances and Industry Relations at Smarsh.

For financial services firms, policies governing the use of electronic communications, the preservation and production of electronic communications records, and evidence of message supervision procedures are a big part of FINRA and SEC examinations.

According to an annual analysis of FINRA disciplinary actions released by law firm Sutherland Asbill & Brennan LLP, violations stemming from electronic communications transgressions generated the highest amount of fines for the self-regulatory organization in 2013. FINRA reported a whopping $15.1 million in fines from 66 cases involving alleged electronic communications violations, a 132% increase compared to fines of $6.5 million in 2012.

The SEC is also stepping up examinations. In its annual exam priorities letter this year, the SEC announced it will target firms that have not yet been examined, particularly those that have been registered for three or more years. The exams will focus on compliance programs (among other things) and examiners will look to determine the effectiveness of compliance programs by evaluating whether advisors are properly identifying conflicts of interest and compliance risks, whether policies are in place and being managed, and whether compliance officers are empowered to establish these programs.

Against this backdrop, preparation for the exams can be daunting. Where do you begin? What types of electronic messages need to be stored for review? Which communications policies will regulators want to see?

To top it all off, you can’t always predict when you’ll be examined. You might know the general timing of reviews, but it’s difficult to discern when regulators will be knocking at your door…which can cause added anxiety.

While audits and exams vary by regulator, company, and exam type, one thing is certain: Regulators now request the production of multiple types of electronic communications records, with supporting compliance program documentation during exams.

Here are some basic steps you can take to help start preparations for the electronic communications data production component of an exam or audit.

1. Know what to archive.

The types of messages that regulators request continue to expand every year. According to the Smarsh 2014 Electronic Communications Compliance Survey, the number of electronic messaging channels firms allow employees to use for business purposes has nearly doubled in the past three years, from an average of 3.6 channels in 2011 to 6.7 in 2014, and message supervision is more complex than ever before. In addition, firms examined in the past year were asked to produce records for email, website pages, instant messages, Bloomberg/Reuters messages, social media, email marketing, and text/SMS messages. While email is still the most common message type requested (by a large margin), you can anticipate your firm will be asked to produce an array of electronic communications records. Today, it’s the content that counts—not the medium that broadcasts the content. The content is what makes a message a business record, and drives the requirement for content archival.
The increased attention on social media records can be daunting, too. For instance, in 2013 FINRA announced social media spot checks for member firms. FINRA can search for and review your firm’s social media pages and posts in your offices during a spot check or an exam.

2. Know what supporting documentation must accompany your archive records.

The 2014 Electronic Communications Compliance Survey also showed requests for several types of supporting documentation related to electronic communications compliance. Among survey respondents who were examined in the past year, 70% said ‘written supervisory procedures’ was the most requested document during the exam, which emphasizes the importance of having solid policies and supervisory processes in place. Along with your archive records, your compliance team must be able to show evidence of supervisory systems that monitor your firm’s electronic communications for compliance with corporate policy. It’s not enough to just have the messages available.

3. Know how to archive.

If you don’t have an archiving solution already, now is the time to put one in place that lets your firm capture, archive, search, supervise and produce the many different types of electronic messaging channels in use at your firm. Since regulators can be expected to ask for records of all of these types of communication, look for an archiving and compliance solution that can handle the internal and external communications channels your firm uses, and where records can be managed under one platform—so you can quickly and easily find all relevant and related messages during an exam, no matter if they originated in email, an instant message, or a text.

4. Know why it’s important to archive.

A comprehensive archiving solution is the tool that gives your firm the ability to produce data upon request for examiners. As noted above, without an archive you’ll likely have a difficult time finding specific records. What if a regulator asks you to produce Facebook records for two of your reps, from the dates of January 20, 2013 through February 15, 2013—along with all emails exchanged between the reps? Could you find the complete set of these records, and find them quickly? You’d also have to demonstrate to regulators that your compliance team supervised these conversations on Facebook and email. It’s not enough to let the data sit in storage; compliance has to review the communication as part of its written supervisory procedures.

Regarding supervision, regulators are known to ask for:

  • Written supervisory procedures.
    Regulators look at how firms retain and capture messages, and the firm’s process for review and evidence of policy enforcement. Written supervisory procedures show regulators what actions your firm takes to identify risk and enforce compliance policy.
  • Proof of supervision.
    Documented records of supervisory procedures—often seen with detailed audit trails—can help demonstrate policy enforcement and evaluation.
  • Disaster recovery or business continuity plan.
    FINRA requires member firms to create and maintain a written business continuity plan identifying procedures related to a potential emergency or significant business disruption. The procedures must be reasonably designed, and enable a firm to meet its existing obligations to customers. The procedures must also address a firm’s existing relationships with other broker-dealers and counter-parties.
  • Archiving vendor solution contract and/or evidence of services provided.
    Regulators may ask for evidence of an electronic communications archiving/supervision system via a vendor contract—to meet requirements for rules SEC 17a-4. The solution needs to allow for immediate search and production/export of messages requested by a regulator, whether for email, a Facebook post, or an instant message, etc.
  • Third-party attestation letter.
    SEC 17a-4 requires firms to have a letter attesting an independent third-party downloader can provide access to the firm’s electronic records if the firm is unable to do so.

To sum it up: It doesn’t matter if your firm uses email, Facebook, Twitter, text messages, instant messaging or even an enterprise social network to communicate and get work done. All of these are now fair game for inspection!

Find out more about social media compliance and hear directly from Jimmy at SMAC on September 18th in NYC.

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