Fiduciary Key Risk

Indicators

FIDUCIARY INVESTMENT RISK MANAGEMENT ASSOCIATION

NATIONAL CONFERENCE
April 25-29, 2009
New Orleans
Presented by
Rebecca Bugaj Zak, Counsel, ReedSmith LLP
Deborah Austin, Vice President, Director Personal Fiduciary Risk Mgmt and Compliance, Union Bank

KEY RISK INDICATORS

What are they?
Key Risk Indicator (KRI): Indicator of a
possibility of a future adverse impact.
Indicator: Warning signals
Possibility: May or may not actually occur
Future: Trying to understand the future, not criticize past
actions

Different than a Key Performance Indicator

(KPI): Measures how well something is
being done.
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FIDUCIARY KEY RISK

INDICATORS

What is their place of importance?

Enterprise Fiduciary Risk Management Program

Identifies, Monitors, Manages, and Reports

Fiduciary Risks
Part Legal, Part Compliance, Part Operational

Fiduciary KRIs are Integral to Identification

FIDUCIARY KEY RISK

INDICATORS

Why are they important?

They promote a culture of compliance with fiduciary
principals and adherence to laws and
regulations, which ultimately will
1. Mitigate losses, legal expenses, and/or regulatory
sanctions/penalties; and
2. Become a tool to promote business efficiencies and
effectiveness as a driver of resources (people,
technology, capital)

FIDUCIARY KEY RISK

INDICATORS
Choosing Key Risk Indicators
Include Senior Management, Business Units
(Fiduciary and Affiliates), Risk, Finance,
Technology, Compliance, Legal, Ethics Office,
Fraud/Investigative Units, and Internal Audit
Focus on critical areas for your institution
Your Business Model and Strategic Plans
Current Product Offerings
New Products/Acquisitions/Divestitures

Support risk monitoring

Support business decision making
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FIDUCIARY KEY RISK

INDICATORS
Build the framework
Not as easy as it sounds: Realistic implementation
timeframes
Clear definition/hypothesis: What is being measured?
Why? Is it meaningful?
Define categories, factors, sources, detail
Types of indicators: risk, performance, leading,
lagging, control
Meaningful triggers for your institution
Management Responses to Triggers
Dynamic and evolving
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FIDUCIARY KEY RISK

INDICATORS
High-Level Indicator Categories

People Indicators
Client/Business Indicators
Fiduciary Oversight/Administration Indicators
Compliance Indicators
Legal Indicators
Asset Management/Portfolio Indicators
Audit/Regulatory Indicators
Operational/Technology
Indicators
Affiliate and Third Party Provider Indicators
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FIDUCIARY KEY RISK

INDICATORS
More Detailed Indicators

Audit/Exam Issues Open, Past Due, High Risk

Compliance Issues Open, Past Due, High Risk
Pending and Open Litigation, Legal Expenses
Employee Turnover
Code of Ethics Violations
New Product Initiatives
Acquisitions/Divestiture Initiatives
Client Complaints
Accounts Closing (service, fee, performance issues)
Reliance on third parties and completed monitoring
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FIDUCIARY KEY RISK

INDICATORS
More Detailed Indicators (continued)
Fiduciary Oversight and Administration
Account Acceptance Exceptions
Fee Exceptions
Volume of accommodation business
Volume of accounts with shared fiduciary
responsibility
Estates open greater than 1 year
Account closings/distributions open longer than x
months
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FIDUCIARY KEY RISK

INDICATORS
More Detailed Indicators (continued)
Asset Management/Portfolio Indicators
Account reviews not completed
Investment Style Appropriateness
Proprietary Product Performance
Portfolio guideline exceptions
Completion of Investment Security Analysis
Brokerage Placement exceptions
Conflict Transactions (own bank securities, proprietary
mutual funds)
Client Proxies outside of parameters
Counterparty Exposure
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FIDUCIARY KEY RISK

INDICATORS
More Detailed Indicators (continued)
- Operational Indicators
Overdrafts/Uninvested Cash
Reciept/Disbursement Volumes
Unpriced Assets or Pricing/Valuation Outside of
Standard Pricing Systems
Trade Errors
Open/Aged Reconciling Items
Fraud Instances
Missing Account Data
Other dollar losses
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FIDUCIARY KEY RISK

INDICATORS
More Detailed Indicators (continued)
Compliance/Legal Indicators
Disclosure Practices: failure to provide form ADV
Failure to get approval for
marketing/advertising/communications for sale of
fiduciary products
Number and amount of high risk country wire
transactions
Percentage of clients in business
activities/locations rated high risk for AML
Number of non-standard client contracts
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FIDUCIARY KEY RISK

INDICATORS
Trust Company Example

Frequency of review (Monthly/Quarterly)

Categories
Leading, Lagging and Concurrent
Established and agreed upon thresholds
Green, Yellow, Red indicator system
Change in risk (up, down, same)
Identify factors that contribute to the indicator and any
change
Outlook
Who Tracks and Provides the Information?

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