10.08.2014
By Terry Flanagan

Wells Fargo Asset Management Navigates Risk

Being a chief risk officer at a buy-side investment firm means more than calculating daily value-at-risk, especially if the entity is part of a larger, highly regulated institution.

“In contrast to a non-bank owned asset manager, where some folks might say, ‘Well, he’s in risk. His role is investment risk and focusing on managers managing the mandates and not straying,’ that’s not the case,” Stephen Young, chief risk officer at Wells Fargo Asset Management’s Affiliated Managers Division, told Markets Media. “We generally have good managers — they implement mandates, they don’t really deviate.”

“Today, more emphasis is on regulatory matters — operational-risk type items, even things such as BSA (Bank Secrecy Act), AML (anti-money laundering), OFAC (Office of Financial Control), and cyber security. There are so many things that fall under the risk umbrella these days.”

The biggest risk issues relate to increased regulation and enhanced oversight and expectation by the regulators. Even though the primary regulator of a registered investment adviser such as WFAM is the U.S. Securities and Exchange Commission, because it’s part of Wells Fargo, it’s also overseen by the prudential regulators — the Federal Reserve and the Office of the Controller of the Currency.

Stephen Young, Wells Fargo Asset Management

Stephen Young, Wells Fargo Asset Management

“For us, right now, the biggest issue from a risk perspective, is the enhanced expectations, the additional reporting, the various parts of Dodd-Frank including Volcker that actually impact our business,” Young said.

Wells Fargo Asset Management consists of three divisions: Wells Capital Management, Funds Management Group, and Affiliated Managers Division. WellsCap is a registered investment adviser with portfolio managers, researchers, and other functions that manage assets on behalf of largely an institutional client base, and this also includes subadvisors to funds.

The Funds Management Group is where funds are created, branded, marketed, and these would include US and non-US based pooled vehicles, including open-end funds, closed-end funds, and UCITs. “FMG creates product and they also distribute product, and they provide a lot of the support associated with product and fund accounting and a host of services associated with the product,” Young said. “That’s where you’ll find the Wells Fargo Advantage Funds which is our retail fund family.”

Young’s division, AMD, acquires ownership stakes in various niche-oriented registered investment advisers. “They span the spectrum in terms of strategies,” Young said. “We have those that are equity focused and more quantitative, which is different than what you would see under the WellsCap umbrella. We have those that are fixed income oriented and we even have a fund of funds based on hedge fund portfolios.”

Young’s role as CRO includes the oversight of the investment risk, fiduciary counterparty credit, operational risk, and regulatory compliance for the portfolio of RIAs that fall under the AMD umbrella. Because Wells Fargo has been designated a systemically important financial institution, or SIFI, any asset manager that’s part of Wells Fargo is going to have certain duties and responsibilities as a consequence.

On Monday, the Financial Stability Oversight Council said that it was reviewing the criteria by which non-bank financial institutions would be designated as SIFIs. “We take the responsibility of considering companies for potential designation seriously, and the Council will consider potential changes in the coming months,” said Treasury Secretary Jack Lew.

In Young’s case, regulatory compliance includes monitoring seed capital for investments and strategies. “We do CCAR (Comprehensive Capital Analysis and Review) stress testing because we’re part of a bank,” he said. “So we fall into this Dodd-Frank CCAR stress testing and more recently we’ve done a lot of work on the Volcker rule.”

“When you’re managing assets that fall into the equity space, the fixed income space, the alternative space, multi-asset, there’s never one system that is perfect to handle all these things,” he added. “You always end up with multiple systems and that makes the aggregation and the reporting that much more difficult.”

Featured image via spectrumblue/Dollar Photo Club

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