Is Your Money Safe? Risk Management Blindspots That Cost Investors Dearly

Both retail and institutional investors who have survived one or more economic recessions have learned that they cannot select their money managers solely on a demonstrated stream of at or above benchmark returns and that they need to include the underlying risk of their investment portfolio in the formula that calculates expected future value. However, the risk denominator in portfolio management analytics may be underestimated or misestimated because of the following three industry problems:

1. The traditional view of risk is disaggregated

The traditional view segregates risk into market, credit and operational. In most organizations, both public corporations that issue equity and debt to investors and privately-held asset managers that oversee investors' money, the various aspects of risk are managed separately. For example, in some typical organizational structures, the Investment Officer is responsible for market risk; the Treasury Officer or CFO for credit risk and the COO for operational risk. Each analyzes and synthesizes risk separately and reports his findings to the Board or Management Committee, leaving them baffled to make sense of the holistic picture. However, risk is not additive or linear and often hot spots in one area may cause undetected issues in other areas.

Market, credit and operational risk were interrelated in one of the most notorious examples of risk mismanagement - AIG's failure to meet its liquidity obligations which led to $170 billion government bailout. AIG was heavily involved in writing CDS with its exposure at the height reportedly reaching $440 billion (market risk), which exceeded what the company could pay in claims when the MBS it insured defaulted leading to a liquidity crunch (credit risk). Additionally, there were signs of inherent operational risks: AIGFP was a minimally regulated and separate hedge fund that leveraged the credit rating of the holding company to place big bets with little reserves. Each one of these issues separately did not pause "crash the car" risk, but in aggregate the market, credit and operational risk factors of AIG could have been lethal to the company and the economy safe for the subsequent government bailout.

2. Regulators are approaching the industry reactively

Significant regulatory tightening ensued after the 2008 mortgage crisis. According to some critics, regulators may potentially be looking at risk far more reactively by focusing on the problems that have already manifested than proactively identifying new risks that could cause the next business failure. For example, the Financial Stability Oversight Council (FSOC) so far designated three US financial institutions as Systemically Important Financial Institutions (SIFIs) - GE , Prudential and AIG and imposed on them increased capital requirements. However, the FSOC does not consider large asset managers to be SIFIs. There is some merit to the logic that asset managers do not require as strong of a balance sheet since they do not own the assets they manage and pass through the downside risk to their investors. Yet, it could be argued that the asset managers' aggregate risk and that their investment processes and technology infrastructure pause systemic risk. For example, over a trillion dollars of passive investments including the iShares brand are managed on Blackrock 's technology platform Aladdin. It is not hard to foresee the dramatic impact of a major failure of Blackrock's platform on the US and global economy.

3. Operational risks is not adequately represented

To manage market risk better, most investors are well aware of basic portfolio hygiene principles including the value of diversification, the importance of looking at volatility driven asset correlation, rebalancing, the criticality of subtracting leverage when assessing quality alpha, the value of protecting for inflation through IL bonds or inflation-hedging assets such as real estate. I would argue that operational risk is as big if not a bigger driver of financial loss as market risk. According to Phillipa Girling, a leading expert on operational risk and author: "operational risk in the headlines in the past few years" is hard to ignore: Notorious examples include "egregious fraud (Madoff, Stanford), breathtaking unauthorized trading (Société Générale and UBS), shameless insider trading (Raj Rajaratnam, Nomura, SAC Capital), stunning technological failings (Knight Capital, Nasdaq Facebook IPO, anonymous cyber‐attacks), and heartbreaking external events (hurricanes, tsunamis, earthquakes, terrorist attacks)." (Operational Risk Successful Framework). Inadequately managed operational risk costs investors, corporations and tax payers billions of dollars: Madoff's pyramid reportedly cost investors $18 billion and the 2008 government bailout cost taxpayers $700 billion. (New York Times Archives)

If the impact of operational risk is undoubtedly large, why do otherwise savvy investors often disaggregate or even completely miss operational risk from the overall expected value analytics of their portfolio and inadvertently accept more risk than they are comfortable with? Part of the problem stems from a lack of a well established methodology to clearly quantify operational risk and integrate it into portfolio management.

Imagine creating a unified industry-sponsored score for operational risk similar to a credit score or Moody's bond ratings, which takes into consideration the fundamental elements of operational risks - people, process, technology, and external events, and quantifies them. That score would then be clearly available for investors along with the returns and market risk of the portfolio leading to a far more accurate valuation. Significant progress toward accountability and transparency could be made if operational risk were to be demystified.

How can investors make safer investments?

What could investors do in an environment of confusing regulatory requirements and limited transparency around operational risk? For starters, Investors can raise their awareness and employ alternatives to address the information asymmetry in the following ways:

1. Select asset managers that demonstrate commitment to operational risk management

Certainly some asset managers understand and are willing to invest in operational excellence and risk management. For example, in the 2014 Review of the Asset Management Industry, the Boston Consulting Group provides an overview of the shadow model where an asset manager can use two counterparties to manage their middle and back office. At Bridgewater Associates, I co-led the implementation of such a model where the firm aimed to create greater transparency, switchability and stay ahead of the regulatory bodies by outsourcing its back and middle office to both BNY Mellon and Northern Trust. FundFire published an article, Bridgewater Divides Industry with Latest Deal, describing the benefits and open questions about the model. It is still early to say whether the industry will embrace this model more broadly. Similarly to gain an operational excellence edge, Citadel and Tudor invested in a custom-built straight-through processing systems that integrate the trading platforms with the post-trade processes creating greater transparency and reliability. Both are aiming to commercialize their technologies and make these available to smaller money managers who may not be able to afford a large in-house technology development team.

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http://www.storagereview.com/seagate_backup_plus_fast_portable_review

The Seagate Backup Plus Fast portable drive is performance-heavy mobile device that provides users a plethora of storage and is the first portable drive that offers 4TB of storage space. Backup plus Fast is fully USB powered, allowing users to bring along their videos, music, and pictures without having to carry an extra external power supply while on the go. Also included is the Seagate Dashboard, which offers users the ability to schedule and automate backups for their computer, social networks and mobile devices.

Seagate's website claims that their Backup Plus mobile drive boasts up to twice the speed of other portable hard drives fast USB 3.0 interface with its transfer speeds up to 220MB/s. Those are extremely good numbers, especially compared to other portable consumer drives such as the LaCie Rugged and G-Technology G-DRIVE that are limited to a single hard drive inside. So how does Seagate's new drive reach this performance level? Well, the device actually contains two 2TB 9.5mm Samsung drives in RAID0 (striped) to account for both the speed and 4TB capacity. The Samsung drives have appeared in Samsung branded externals prior, but Backup Plus Fast is the first product to leverage the drives in this creative way.

Also available in conjunction with the drive is a free Seagate Mobile Backup app for the iOS and Android mobile devices. The app allows users to back up all of their content to the drive, when on the same network, or to the cloud when on the go. Additionally, users can use the Save and Share features to download and upload content from social network sites such as Facebook and Flickr. To make sharing the drive between multiple systems more convenient, when the pre-loaded NTFS driver is installed on the on a Mac, Backup plus Fast can be used between Windows and Mac computers without having to reformat the drive.

The Seagate Backup Plus Fast Portable 4TB is shipping now with a street price of $269.99 and is backed by a limited 3-year warranty.

Specifications

* Capacity: 4TB (STDA4000100)
* Performance: 220MB/s
* Product Colors: Black
* Length: 116.90mm
* Width: 82.50mm
* Typical Weight: 0.307kg
* Seagate Dashboard pre-loaded on drive
* Contents
* 18-inch USB 3.0 cable
* USB 3.0 Y-cable
* Quick start guide
* Warranty: 3-year limited

Design and build

As is the case with many Seagate devices, the Backup Plus has a simple design with the company logo on the bottom corner. Its smooth metal enclosure (top and bottom covers, middle section is plastic) helps resist scratches and fingerprints and easily fits into a laptop bag or backpack. The side end of the drive houses the USB 3.0 connector port and the top cover has a small drive activity light.

Overall, the Backup Plus is well built; but is not user accessible, which is not uncommon for portable drives. If a drive fails, the user will have to RMA the entire thing since they can't swap one drive on their own without damaging the enclosure. Opening up the drive exposed two Samsung 2TB M9T hard drives connected through a dual-SATA to USB 3.0 adapter.


Usability

The Seagate Dashboard is included with the entire Backup Plus family, and with it users are able to have a simple, streamlined method of ensuring that all of their content is backed up. Overall, we find the Seagate Dashboard is very simple to use as it allowed us to easily protect, share and save data.

The Dashboard software is located on the Backup Plus drive itself, so there's no need to download it. To install the Dashboard software on your computer, you simply have to double click the file (.dmg for Mac users, .exe for PC) and follow the onscreen instructions.

If you're using a Mac, you will eventually be asked to select whether you'll be using your drive on the Mac, PC or both. If you select the only Mac option, the drive will reformat itself to integrate with Mac applications such as Time Machine.

After installing the software, users will see a very simply layed out dashboard with the connected drive listed on the left; we were impressed with its simplicity and easy navigation. The "Social" section allows users to log in to their account for each site and the backup up all of their images and videos; these can be initiated automatically. The Dashboard also allows users to share their photos and videos located on your Backup Plus drive directly to their Facebook, Flickr or YouTube accounts. This functionality worked seamlessly.


With the growing number images and videos stored on smartphones and tablets, backup is something that is becoming very important for these mobile devices. The "Mobile backup" section allows users to back up their movile devices that have the app installed on their phone. Additionally, once you set up the backup plan in a few quick steps, backing up your phone or tablet is automatic. iOS users can find it on iTunes while Android users can find it on the Play Store.

Performance

Using our Consumer Testing Platform, we measured 2MB sequential speeds. The Seagate Backup Plus clocked in at an impressive 237.2MB/s in the write column and 183.4MB/s for read activity. By comparison, the recently reviewed LaCie Fuel (USB 3.0) measured 98.3MB/s read and 109.1MB/s write. To approach Backup Plus Fast's performance numbers, we have to compare it to a DIY solution like the Newer Technology Guardian MAXimus Mini. The MAXimus Mini (RAID0) measured sequential speeds with an Hitachi 7K500 array of 213MB/s read and 213MB/s write. In aggregate, pretty similar performance, but the enclosure approach doesn't include the software or cloud features, though it does allow for physical drive management and optional RAID1 configuration.

When testing with 2MB random transfer speeds, the Seagate Backup Plus measured read and write speeds at 90.0MB/s and 135.8MB/s respectively. The LaCie Fuel measured read and write speeds at 71.2MB/s and 79.7MB/s respectively. The dual-drive fast again tops the performance table as expected.

It is worth noting that the Backup Plus Fast uses RAID0 to achieve it's high speeds and capacity, something that is not without risk. In a RAID0 environment, there is no parity of data, so if either drive fails, the entire RAID fails and data loss is certain. The drive then makes for an excellent backup target or media file repository, especially when combined with Seagate's software for cloud backup, but it should not be relied upon as a primary data storage volume for backup or files.

Conclusion

The Seagate Backup Plus Fast Portable drive with USB 3.0 provides consumers with a very durable and fast 4TB mobile hard drive; it is also bus powered, meaning that users do not need to pack those pesky AC cords with them when they are on the go. Consumers working on the go will find that the Seagate Backup Plus fast especially useful due to its plethora of space and speedy write activity. Under the hood, the Seagate drive contains two 2TB drives in RAID0 to account for the speed and high capacity, giving it a substantial boost in performance. Using a RAID0 configuration comes at a cost, however, as it allows for total data loss if one of the two internal drives fail. Users should thus be wary of that fact and we recommend that users are backing up their data to something else on a regular basis or use Seagate's cloud option and apps to backup. This all said, this is a common issue for most mobile drives so it's not too much of a surprise or hindrance.

One thing that we really found handy is that users can share and manage files between Windows and Mac computers without having reformat the drive; a very welcomed feature for users who cross-platform often (eg. work vs home). The included software bundle, which adds an app for mobile device backup too, is one of the more comprehensive available in the market today.

As far as performance goes, we measured 2MB sequential speeds at an impressive 237.2MB/s in the write column and 183.4MB/s for read activity, which is much higher than other premium mobile drives for only around $60 more. The extra 3TB of data, which is significantly more storage than most portable storage solutions, more than makes up for the slightly higher price for many users.

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How can you improve your risk management and internal controls? 'The board should, at least annually, conduct a review of the effectiveness of the company's risk management and internal control systems and should report to shareholders that they have done so. The review should cover all material controls, including financial, operational and compliance controls.' 'The problem with referees is that they know all the rules but don't always understand the game.' Learn this here now. We really need to get real since many employees 'game' their targets, their result and most of what they do at work to suit themselves. I can't think of many people who put the needs of their employer above their own personal interests. Which means your improvements to risk management and internal control have to be set within the culture at work, to make any real sense. One way forward is to re-write the Corporate Governance Code to move away from an annual accountant-centric event that means very little to most people, to a more straightforward version. My suggested re-write of the code would be: If these four things are happening the hope is that there will be fewer headlines that undermine all kinds of organizations, and which ultimately damage the reputation of global economies. I asked whether there is a need to train employees to improve the way they manage risk and sharpen their business controls. I feel the answer is; 'yes there is' - which is why Business Controls Training will continue to develop a range of standalone e-learning courses for elearningmarketplace.co.uk. Hop Over to this Website Dym