Risk Management Career Profile
Risk management assesses and controls the risks faced by a firm
Benjamin Franklin once famously said that an ounce of prevention is worth a pound of cure, and this sentiment is what risk management is all about. It's a field within financial services and other industries that involves identifying, assessing, and quantifying business risks. Measures are then taken to avert, control, or reduce them. Risk management identifies and measures the risks faced by a business or firm.
Job Description: Duties and Responsibilities
Risk managers might be generalists who cover several different areas, or they might be specialists who concentrate on a single area. The major categories of risk within the financial services industry include:
- Defaults on loans extended by the firm
- Losses on securities inventories held by traders
- Losses on investment securities held for the firm’s own account
- Counter-party risk—another financial firm fails in its obligations to yours
Risk management personnel develop, implement, and enforce rules and procedures designed to mitigate these risks. For example, the value of inventory held by a securities trader might be strictly limited.
Data breaches and identity theft are growing problems in all industries, not just financial services. The potential exposures are increasing exponentially from both monetary and reputational perspectives. The best risk management departments and risk management professionals take active roles in setting policy regarding data security in close partnership with their respective firms' information technology groups.
Risk management personnel also employ various financial instruments and contracts to control risks, such as insurance, swaps, derivatives, futures contracts, and options contracts.
A Risk Manager's Typical Schedule
The time commitment required by a career in risk management can be highly variable. It can depend on the firm and the position. Technically, it's usually a nine-to-five job, but risk management is a vital function so managers can generally expect to put in work weeks that exceed 40 hours, at least occasionally and in times of emergency. Risk management personnel might be constantly on call during periods of high market turbulence and financial uncertainty.
The Pros and Cons of Risk Management
Risk management is a crucial function and thus has a great deal of intrinsic job satisfaction. Positions in this field are typically well-paid and well-respected. The work can be fast-paced and stimulating.
The flip side of working in such a critical field is that the demands of the job can become overwhelming in turbulent periods, particularly when weighty decisions must be made on a moment's notice.
The "policeman" aspect of risk management can create an unpleasant adversarial relationship with employees and staff and some categories of producers, especially securities traders. The psychology of power is such that influential people in the firm, such as members of executive management, are likely to resist playing by the rules.
Education, Skills, and Experience Required
A bachelor's degree is the bare minimum if you want to work in risk management, and an MBA is more typically required. Courses in risk management are increasingly common at both the undergraduate and graduate levels, and some institutions offer degrees in risk management. A four-year degree in a business, economy or finance area can often suffice, however, because this is also a field where it's possible to get your foot in the door and work your way up, gaining on-the-job experience on the inside.
Strong quantitative skills are a must, and a background in management science and in the development or use of predictive models can be very helpful.
A primary concern for risk managers in securities firms tends to be potential mark to market losses on inventories of securities held by trading desks. As a result, prior experience as a trader or as a trading desk assistant can be invaluable for a risk manager in this type of firm. When Merrill Lynch led the industry by establishing the first such position on Wall Street in the wake of the 1987 market crash, the firm tapped a senior trader for the role.
The Possibility of Certification
Several formal risk management certifications are available, and they're being required by a growing number of employers. They can help start or advance a career in the field, but a majority of companies don't yet demand them.
Experience in law, accounting, compliance, insurance, or operational areas of the financial services industry are important credentials. Risk managers who oversee securities trading should have intimate knowledge of trading practices and procedures, and this knowledge is best gained from prior experience as a trader or as a trading desk assistant.
Salary and Benefits Range
The Bureau of Labor Statistics (BLS) combines risk managers with other categories of financial managers, but pay packages for risk managers often far exceed the averages for financial managers in general. Those employed in this position might earn bonuses and commissions in addition to salaries, and they often receive the added perk of profit sharing. And, of course, compensation can vary a great deal by an employer.
At a minimum, risk managers typically receive total pay and benefits packages in the mid-$50,000 a year range, but this is most common when they are just starting out. They can earn as much as $140,000 to more than $160,000 with time and experience, although the $120,000 range is more the norm. Freddie Mac and Kaiser Permanente paid over $118,000 to managers in this field as of 2018, while Credit Suisse compensates at about $130,000 annually.