Fast track to a risk register

Every business should have a risk register setting out the main risks the organisation faces and how it is dealing with them. A financial advisory business needs it more than most because of its regulated position. It is a fair bet that most IFA businesses do not have such a document, so here is a “fast and dirty” guide to putting one together.

A risk register, in management jargon, should be a living document. So you should use it as the basis for discussions at meetings and it should record the current and changing status of each of the main risks. There is no point in creating yet another checklist and putting it away at the bottom of some digital drawer, never to be looked at again.

The people who will use the risk register will be senior management and the board. They should review the document on a regular basis – at least once a year – and focus each meeting on the areas that have not been brought up to scratch. It is best to set up a risk committee to look at the minutiae. Keep track of how well the business is doing sorting out the risks it deals with via a simple traffic light system to monitor progress.

Creating a risk matrix

A good way to get the process going is to have a group brainstorm to list all the risks the business faces. You need to get into a state of creative pessimism and look at all the main areas of the business in turn. Then sort out the detail. A final document will have columns going down the page with headings like:

  • Area of risk
  • Risk
  • Impact
  • Probability
  • Action or mitigation
  • Status (red, amber, green)
  • Comment.

You can categorise risks according to likely financial impact and probability of occurrence. So, for example, the loss of a junior member of staff is probably very likely and the cost to the business of their leaving and needing to be replaced is not great. In contrast, the loss of a major business winner may be less likely, but the impact might be huge. It can be helpful to ascribe to each risk area up to three levels of impact and probability. Assign priority.

In the matrix you will end up with, the highest priority should be given to high impact/high probability risks – the business cannot survive long with any of those major problems. High probability and low impact are the stuff of everyday management life. Systems and controls should deal with them. The most serious problems come from high impact/low probability events, like unsuitable advice or a major system failure. Sometimes they can be mitigated by insurance, but often they cannot.

Main areas of risk

Here are some of the main areas of risks that typically an IFA business might face. Identify your own areas of risk and vulnerability.

  • Type and spread of business and markets – a market downturn can hit a specialist investment business hard, especially if the bulk of the income is derived from value based charges. Some diversification can mitigate risk.
  • Dependence on a few providers – concentration on a single provider can provide efficiency benefits for both business and clients. But it also concentrates risk if something goes wrong.
  • Suitability of advice – the due diligence that firms carry out on solutions and providers is often not up to scratch. Be prepared to buy in specialist data.
  • Financial – cashflow and capital adequacy should be at the top of every firm’s list of risks. Can we afford these premises when the rent review comes up? How will it affect our financial resilience?
  • People/remuneration – does the business pay too much (or possibly too little) to advisers and other staff so that they are in danger of draining the business of resources or might be tempted to leave? Is the remuneration structure incentivising them to behave well?
  • Systems and IT – are they reliable? What about the back up? Are there robust checks to ensure all business and client instructions are processed correctly and on time?
  • Data security – are client and business data safe? Could a casual burglar get into the system? Would the loss of a laptop or other portable device compromise client security?
  • Structure and succession – is the ownership secure? Who will take over the business in the long run?

Keeping a close eye on the risks facing the business is probably the main function of the board. With any new idea or project, always ask: what’s the downside risk?

Danby Bloch is Editorial Director of Taxbriefs Financial Publishing


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