Low Hanging Fruit: Risks not worth tolerating for a small-to-midsize financial firm

Based on nearly 30 years experience in IT in the financial services industry, I’m well aware that CIOs and COOs in investment management, wealth management, and financial services face massive amounts of risk and uncertainty.  Being an IT leader in this environment is more challenging than ever before. Smaller entities have different challenges compared to much larger financial services companies, such as limited budgets and resources, tight deadlines, and a complex regulatory landscape. However, in my experience, there are at least three types of risks that are not worth tolerating irrespective of size:  

1. Reconciliation. When dealing with multiple systems across different organizations, reconciliation processes catch any discrepancies between these systems. When your organization makes a trade, that may involve a broker/dealer and custodian, and your internal systems - then all tracking information (cusips, quantity, rates, dates, etc) must all be the same across all the systems.  Reconciliation will eliminate the issue of selling assets that the client does not own or buying securities against less cash.  Depending on the volatility in the market and volume of the trade, this may end up being a significant loss for a financial institution.  For example, if an average discrepancy of just $1.00 occurs for a stock sale of 10,000 shares an average of once a month, this poses a $120,000 loss over the course of a year. 

One best practice is to designate one system as the book of records (most likely the custodian’s system), and then reconcile all other systems to it at least once per day and ensure the opening holdings are accurate. The potential ideal solution is to sync all your systems in real time and track actual trades from bid to settlement, so a detailed record can be maintained for optimal cost savings and to satisfy regulatory compliance.

2. Remove Excel from your mission critical workflows. Often, managers, analysts, traders and back office personnel use Excel to record transactions and track prices. There are two critical drawbacks of this approach:

  • Difficulty of retracing prior trades and finding the correct files when needed.
  • Commonality of human errors when using Excel.

In my experience, Excel should only be used as a calculator, not a record keeper. One potential solution is to replace Excel with a clear system workflow that everyone follows which allows all actions to be entered into a database for easy traceability and regulatory compliance.

3. Pre-Trade Compliance:  Pre-trade compliance is the step that confirms compliance impact before a trade is executed. A financial institution should have an automatic notification if any rule (regulatory or client driven) will be violated. For example, a client may have a stipulation to not allow any one security to comprise more than 5% of their portfolio (including mutual funds, bonds, or ETFs).  If a particular trade is scheduled and has a small component of that security (to increase the holding over the 5% benchmark), your firm may risk losing the client.

In conclusion, with the myriad of challenges that a financial services CIO or COO faces, these are the areas that can be considered ‘low hanging fruit.’ If you have a challenge in the financial services sector and would like an expert, independent point of view, or would like to learn more about Guilford Group’s experience in the financial services sector, contact Rakesh Kapur (COO, 317.814.1040).

Guilford Group is a multi-discipline information technology consulting firm specializing in enterprise application development (mobile, web, and data analytics), IT project management, IT staffing, IT consulting, System integrations, and maintenance, support, and system upgrades. Guilford Group has built a 20+ year reputation for our integrity, accountability, personalized attention and commitment to excellence.