Risk management is the process of identifying, assessing and controlling threats to an organization’s capital and earnings. These threats, or risks, could stem from a wide variety of sources, including financial uncertainty, legal liabilities, strategic management errors, accidents and natural disasters. IT security threats and data-related risks, and the risk management strategies to alleviate them, have become a top priority for digitized companies. As a result, a risk management plan increasingly includes companies’ processes for identifying and controlling threats to its digital assets, including proprietary corporate data, a customer’s personally identifiable information (PII) and intellectual property.
Broker-dealers, like all businesses, live in a world of risk – operational risk, legal risk, reputation risk, managerial risk, credit risk, among others. Of course, the overarching concern – regulatory risk – is something unique to regulated entities. In many respects, management of any type of risk comes down to the same calculus faced by a broker-dealer’s customers, that is, the ability to balance risk against the potential rewards. Both in theory, and typically in practice, investors make investments hoping the potential reward – profits – outweighs the risks attendant to their particular investments.
Risk return tradeoff is the balance between the desire for lowest possible risk and highest possible return.
Sources of risk in the Brokerage Business:
An accurate customer risk assessment will help you acquire the most profitable consumers while minimizing risk.
Management of customer risk includes:
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