Building a risk management team

March 2005

As firms in the financial services arena better understand the significant risks they face, many are deciding to build or grow their risk management teams. Firms all across North America, Europe, and Asia added risk management staff in 2004. Coupled with the explosive growth of economies in Asia, this trend is expected to continue for the next decade. However, as the risk management field continues to mature, senior executives are becoming more selective as they look to hire these individuals who, in many cases, are relied upon to ensure the future existence of the firm.

Risk management departments are called upon to set and monitor risk limits; build, validate, stress test and back-test data and models; work with regulators to provide assurance that financial markets and stockholders are being protected; and to assist the business units in looking at the next deal in light of the risks involved. Who are these essential people, and what backgrounds are firms looking for when filling risk management roles?

Four Essential Skills

1) Academic Credentials in Finance
First, firms seek risk managers who have strong academic finance credentials. While many quantitative risk managers have PhD's in physics, statistics, and computer science, the top firms seek individuals with strong academic credentials in finance. MBA's in finance, with rigorous course loads in quantitative finance, from the University of Chicago, Wharton, and NYU, for example, get the attention of hiring managers. Doctorates in finance and econometrics from top US finance institutions are also preferred to non-finance degrees. One top risk professional told me, "I wouldn't expect to run a nuclear facility, so why would I want a nuclear physicist running my portfolio analytics?"

2) Market Experience
Second, firms seek individuals who understand trading and how the global financial markets operate. Ex-traders, or individuals who have hands-on experience on the trading floor, are regarded quite favorably by senior risk managers. Why? Because risk management does not operate in a static environment - new products or trading strategies are introduced and new deals are structured routinely. Risk managers must be able to quickly understand the trade or the deal, as well as the motivation of the traders/portfolio managers so that the risks of the deal are properly and fully understood. Individuals who have trading experience are highly valued at capital markets firms, as well as hedge funds, where the pace is fast and the risks are significant.

3) Strategic
Third, the leading risk managers need to be forward-looking and strategic minded, with an eye to understanding potential risks, rather than reporting on yesterday's VaR levels. The strongest risk management teams are able to keep pace with the evolving and volatile nature of the financial markets, and in more and more cases, assist the front office, portfolio managers and chief investment officers reach a solution that satisfies the investment objectives as well as the risk parameters. This is especially true in the area of credit risk and structured products, where credit risk managers are often involved in the structuring process to ensure that risks are adequately quantified and hedged so that the deal will pass exposure limit tests.

4) Communication Skills
Finally, firms have determined that not only must risk managers be educated in quantitative finance, experienced in trading, and forward-looking, but that they also be able to translate complex financial products and risk management concepts, practices, and processes into language understood and appreciated by the front office, management and board personnel. In many cases, risk managers are called upon to summarize the myriad of risks that financial firms face, and to translate this into actionable concepts that can be addressed at the executive committee level. Strong interpersonal, general business, and communication skills are imperative for risk managers to be successful.

New risk managers starting their career should first choose a finance degree from a top quantitative program, and then select an opportunity close to the trading desk. An avid interest and thorough understanding of the financial press is also highly recommended. Risk managers should be able to grasp the relationships between global events and the financial markets, and failures such as LTCM, China Asian Aviation, Enron, and so on. Hiring managers in this field should clearly understand the skills they desire and need within the risk group. They should not settle for someone who does not have the proper balance of quantitative, market savvy, strategic and communication skills required for success.

While these fours skills are difficult to find in one person, they do exist. As the market appreciates the value of exceptional risk management and this skill set, firms are compensating top risk managers - those key individuals who are one or two levels below the CRO level - with annual packages in the $500,000 to $1.2 million range. As one might imagine, this provides ample incentive for individuals to select risk management as a rewarding career.

Michael Woodrow
Risk Talent Associates LLC

About Risk Talent Associates
Risk Talent Associates ( is the leading international executive search firm focused exclusively on positions in the fields of market, credit and operational risk, as well as financial compliance and risk technology. Risk Talent's expertise, industry knowledge, proprietary network and dedicated focus shorten the recruiting process to deliver senior and mid-level risk managers in the capital markets, asset management, energy, consulting and software industries. Risk Talent has offices in New York, Chicago and London.
©2005 Risk Talent Associates LLC. All rights reserved.

Industry Focus

  • Capital Markets
    investment banks, commercial banks, federal agencies, and financial exchanges.
  • Asset Management
    traditional asset managers, hedge funds, fund of funds, and insurers.
  • Global Corporations
    major corporations, including construction, manufacturing, agricultural, and commodity as well as their financial subsidiaries.
  • Software Analytics
    risk management software solutions.
  • Oil/Energy & Renewables
    firms that develop, manage and market energy.
  • Risk Consulting
    consulting firms, administrators and ratings agencies
  • Healthcare
    hospitals, health insurance providers, healthcare organizations