Fund managers warned on risks

ASIC warned that some fund managers need to lift their game on risk management because many remain unprepared for large shocks on financial markets. The regulator found scope for improvement in how managers identify and manage risks that could affect investors and funds.

Key-man risk refers to the danger that the loss of one or two star fund managers could trigger outflows of funds or affect investment returns. ASIC highlighted this as a material risk because concentrated reliance on a few individuals can create instability for investors if those managers depart or underperform.

ASIC's review covered a wide range of fund managers that help oversee Australia's retirement savings — from some of the biggest managers (including those owned by banks) through to boutique operations. The review aimed to assess the adequacy of their risk management systems across the sector.

The review covered fund managers that help oversee about $1.3 trillion of Australia's retirement savings, underscoring the systemic importance of strong risk management across the industry.

ASIC commissioner Greg Tanzer noted that while many fund managers had adequate systems, those that weren’t part of a bank or a large life insurer generally showed more scope for improvement in their risk management capabilities.

ASIC found that some investment managers relied too much on external compliance and risk-management consultants without necessarily having the in-house skills to independently assess the quality of those services. That reliance can weaken a manager’s own ability to identify and control risks.

According to ASIC's findings, fund managers that are unprepared for large shocks on financial markets may be more likely to experience problems that could lead to fund outflows or impaired investment returns. For investors, this highlights the importance of understanding how their fund managers manage risk.

ASIC commissioner Greg Tanzer commented on the review, saying that while many fund managers had adequate risk systems, there was clear scope for improvement — especially among smaller or non-bank-affiliated managers — and that managers need to strengthen their preparedness for major market shocks.