Change Is The Constant In Modern Wealth Management.
Melissa Sexton, CFA is the head of Investment Risk for Morgan Stanley Wealth Management, overseeing $855 billion of managed assets. Prior to this, she spent 10 years as Chief Risk Officer at two different hedge funds in New York. While most of Melissa’s 25 years of experience has been in a variety of Risk Management roles, she worked in the front office as a derivatives trader and has continuously worked on projects which integrate risk management with information technology. Ms. Sexton received a BA in Mathematics and Economics from Boston University and earned her CFA charter in 2001.
Christopher P. Skroupa: Can you comment on the pace of change in Wealth Management including the regulatory environment?
Melissa Sexton: The only thing that is constant in this business is change and that’s what makes it such an exciting place to be. The business itself is changing as clients want access to a broader array of financial products which had previously only been available to institutional investors.
From a regulatory perspective, there appears to be a shift in focus. Immediately following the 2007-2008 financial crisis, regulations such as Dodd-Frank placed increasing focus on the capital adequacy and systemic risk of financial institutions. More recently, with the introduction of the Department of Labor’s Fiduciary Standard Rule, there is increasing focus on individuals and their retirement savings. This new regulation places additional scrutiny on agency risk, or the risk financial firms take managing assets on behalf of clients.
Skroupa: How does managing agency risk differ from managing principal risk?
Sexton: The approaches and methodologies used to measure and manage such risks are similar. In sales and trading businesses, a firm’s balance sheet is exposed to investment risks such as market, credit, and liquidity, just as our clients do in their individual investment accounts. However, we cannot aggregate client risk exposures and look at them as one entity like we can for each of Morgan Stanley’s trading desks. For assessing agency risk, we must incorporate each client’s unique financial goals, risk profiles, investment time horizons, and experience levels into our framework. We have focused on risk appetite, setting risk appropriate boundaries and investment guidelines and investing in technology infrastructure to monitor and enforce them.
Organizationally, there is a separate group who is responsible for managing the bank’s principal risks and we have risk management teams like mine who are dedicated to assessing how our clients are doing and act in an oversight role to help financial advisors.
Skroupa: Can you talk about the risk assessment and supervisory tools that you use in your role?
Sexton: We continue to integrate advanced data analytics into our risk monitoring because these tools are ideal for spotting outliers in large data sets. The technology being leveraged today, tools like R and Python, allow for much faster data processing so that we can spend more time analyzing and actioning results. One of our goals is to be able to predict whether certain behaviors have a greater propensity to deliver poor outcomes. We are now at an exciting point because we’ve been at this for a while and have collected a large amount of data. This data can now be used to essentially teach the computer to recognize such patterns of behavior as they are occurring rather than identifying issues after they have occurred.
While we’ve made a lot of progress, we need to constantly enhance our IT infrastructure to make sure new data is captured completely and accurately. We also need to ensure our risk analytics are dynamic and sophisticated enough to accurately measure risks of increasingly complex financial products.
Skroupa: What are some of the lessons you’ve learned over your career?
Sexton: First and foremost, become a domain expert and learn the nuances, vocabulary, and drivers of the business. This leads to not only more effective and relevant risk models, but also gets you a seat at the table for strategic discussions.
Two, hire people with quantitative skills. It’s a mistake to assume data scientists cannot communicate with business people. They tend to be people who are creative and learn quickly and will easily pick up domain expertise. Once they understand the business, they can constantly question assumptions we make so that data is translated into meaningful information.
Three, embrace new technology. With so much fear today about technology replacing jobs, I think these new tools actually promote more transparency, communication, and collaboration, which are all essential to successful risk management. These are things that are distinctly human and machines cannot grasp.
Skroupa: What do you see as the regulatory focus in the future?
Sexton: I think it looks a lot like today, with an emphasis on individuals and more sophisticated risk management. Since the 1980s, the responsibility for paying for retirement has shifted from corporations to the individual and there is now more than $20 Trillion of U.S. retirement assets. Wealth managers have a huge responsibility here and effective risk management is critical.
Christopher P. Skroupa is the founder and CEO of Skytop Strategies, a global organizer of conferences.