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What are the greatest risks facing fund managers? 

Otherwise known as fat finger syndrome. Processes can be put in place but at the end of a stressful day mistakes can and do happen.

Administrative mistakes can cause a fund to lose value or result in a number of clients losing money. An advisor or analyst could inadvertently increase allocation in certain asset classes or products, the market can swing quickly, and before you know it the fund is down, clients are down and claims can follow. 

From a claims perspective timing is key. Mistakes can sometimes benefit the client, at other times they can be to the detriment. 

We have seen timing work against a client to dramatic effect: 

A fund manager had intended to invest in equities for a particularly sophisticated client in July 2021. The fund manager thought that the asset classes had been adjusted and that confirmation had been received. A technical error meant the adjustment had not been concluded as the operating system had suggested. Money sat in cash rather than invested in the equities market. The market value of the intended equity investment increased 6-7% over several months. The loss to the client was evident when the mistake was discovered a few months later and for the purposes of transparency the client was informed. A professional negligence claim followed, as was expected. Compensation was agreed to put the client back in the same position as if the assets class was adjusted as indicated. 

But things got worse for the fund manager. In the period shortly after the loss was discovered, the trouble between Russia and Ukraine hit the news and the markets dropped. If the mistake had been discovered later (after the markets had dropped) there would have been no loss to the client and no claim. 

It was a case of bad luck and bad timing. 

The validity of claims against a fund manager depends on the agreement in place with their clients.  

In this instance, the fund manager was running an investment portfolio for a sophisticated and High-Net-Worth individual. An investment plan and course of action was agreed in writing and that plan was not actioned as agreed. The claim was black and white. 

You could argue that such instances should be entirely avoidable, but increasingly our reliance on technology means such mistakes are on the rise. Not because the technology fails, but because the fund manager is not using the platform correctly or fails to notice a warning message, such as ‘transaction incomplete’, ‘trade pending’ etc. 

When markets are static or consistent, such mistakes can have little impact, but we live in an increasingly volatile world. The stock markets at the time of writing are up and down almost daily, and such volatility can exaggerate minor errors. 

Our advice is to: 

  1. Check and check again, that trades and deals have been concluded as intended and at the right values.  
  2. Create a process of continuous auditing to monitor and check files, client accounts and the fund.
  3. Use a four eyes approach where possible. 
  4. Ensure adequate and thorough training on all platforms and technology being used, especially when using technology that is new or that has been upgraded. 
  5. Remain well insured when all else fails.

Whinney Insurance are industry experts, we can help protect your business from risk.

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