The lazy guide to brokerage risk response: tips and strategies
Author: Albina Zhdanova
If you look at the recent discussions, podcasts, and blog posts about brokerages and trading, you will likely find lots of information about risk management. We at TFB also like to cover risk-related subjects as they are always relevant.
Today, we will be talking about five strategies and routes you can take once you know what your risks are or once you have faced them.
Not surprisingly, the first risk response strategy is to avoid the risks. There are some threats to the company that are just not worth it. For instance, brokers shouldn’t risk their reputation and/or licenses experimenting with grey-area trading strategies. Another example that we have all witnessed recently is keeping employees working from home, helping them avoid putting their health at risk.
Avoidance might sound like the most logical way to go. However, it can do more harm than good if brokers are overly cautious and reluctant to face any potential risks. An example here would be not offering crypto to clients in fear of changing regulations. Would it help avoid some potential risks? Yes! But it would also make you miss out on new prospect traders and might even contribute to the brokerage’s decline in market share.
The ‘reduce’ approach works well for risks that do not represent a catastrophe but can be classified more as an inconvenience. A practical way to implement this approach would be to install automation software that would take over some manual tasks. Let’s say you are a broker who has to prepare a daily end-of-day report. If you are doing it manually, not only are you wasting your billable hours, but you are risking making a mistake. If you were to introduce a tool that would do this for you, you would be freeing up your time and reducing the chance of error. We could say that automation eliminates the risk entirely, but there is always a possibility that data is corrupted or something needs to be custom added, hence not reducing the risk by 100% but lowering it significantly.
If you are not willing to deal with a business risk, you might want to transfer it to a third party. An excellent example of this practice would be hosting your environment at a cloud provider or using SaaS solutions. In that scenario, we acknowledge the risks of disasters, outages, and software failures and we are outsourcing it to the other party to manage. So, as a broker, you will not be required to invest in top-level hardware, plan out disaster recovery strategies and hire an IT team to look after your infrastructure.
And in this instance, brokers are transferring the risk, but they are also reducing it by letting professionals do the work where they are less likely to make mistakes or fail. And this should be in the back of your mind every time you consider transferring your risks. Surely it wouldn’t benefit your company if your 90% chance of risk happening would simply be offloaded to someone else. The desired effect is to lower the probability along with the transfer.
The next approach — accepting the risk — can work independently or in combination with other risk response strategies. If the identified risk is tolerable and has a low impact on business, it might make more sense just to accept it. Identifying threats and working out plans to deal with them is resource-intensive. And for companies, one of the key focuses should be efficiency; otherwise, they will go out of business.
If the risk is higher than you can tolerate, then it’s best to not only accept it but to pair it with another strategy, e.g., risk transfer. That’s what many people use insurance for. They accept the fact that their newly built data center can suffer from storms or fire. But they have an insurance policy in place to provide a safety net if something bad happens.
Imagine a life where you avoid all risks. Whatever it ends up looking like, it probably won’t be very exciting or successful. Running a brokerage (or any business, for that matter) is risky, and so is trying new things.
How is it different from accepting the risk? When you take a chance, you are active about it. There is a plan for dealing with the risk if it happens and a strategy to clean up once it’s over. We make preparations for the worst, but we are focusing on the opportunity and the benefits it might bring.
A good backup plan with a step-by-step guide will remove panic and bring structure. If a fire happens, it’s one thing to have insurance and a different story to have a backup plan. The Tools for Brokers team can help you map out the possible routes to ensure you experience minimal disruption.
Bonus tips to approaching the risks
We have compiled a list of tips that go with any risk response strategy that a broker can choose:
- A missed opportunity is also a risk. When assessing the risks associated with a specific project or any changes to your business, make sure you think through the loss that will occur if you don’t go ahead with the initiative or should it fail.
- In general, you might try and perceive opportunities as positive risks. It can help get you out of a constant fear mindset and learn to treat risks as something less frightening.
- Danger always looks bigger through the eyes of fear. Not all risks are equally risky. Some are just minor inconveniences, while others can tear your company down. Learn to separate them and only worry about the risks that are actually worth being concerned about. If you are unsure where to start, divide them by the level of impact and probability of happening. Once you have your high impact, high probability risks figured out; you will be able to address them. And only then focus on the rest. Time is a limited resource, so by the time you deal with the most pressing threats, the less impactful ones might dissolve by themselves. And if not — they won’t affect your brokerage as much.
- Let’s say you’ve identified your risks. Before you go ahead and start managing them, think about their root cause. Always focus on the source, and you will be ahead of the game.
- Don’t leave your risks unattended. If none of the team is assigned to a risk, then no one is dealing with it. Personal responsibility makes a big difference.
The risk response you choose will depend on many factors. And your approach to risks will also change over time. Proactive risk monitoring and analysis are crucial in making the right decisions. If you fully understand the risk (i.e., the chance of it happening and the severity of the consequences), you are more likely to choose the optimal response strategy.
Risk is an integral part of running a brokerage, and it is paired with opportunities. So when you are working out your risk management plan, don’t let fear stop you from greatness.
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