As per the Global Association of Risk Professionals (the entity that awards the FRM certification), 9 of the top 10 FRM recruiters in the world are banks. Due to the very nature of the FRM core curriculum, it is a certification that is best suited for financial risk management type roles, among others. Even though banks and investment funds are the ones most keen on managing financial risks, almost every sizeable company in every industry would very much like to do so as well.
The FRM curriculum is definitely more quantitative and math-heavy than other certifications like the CFA. Therefore, if you are someone who likes to make sense of large chunks of data and enjoy running multivariate regression analysis when you are bored, you will just love the FRM curriculum. But at the end of the day, all of that math is just a tool to achieve the ultimate goal of quantifying and managing risks. That is what an FRM is really about.
Financial risk management roles are what an FRM would be most suitable for. However, having a solid background in risk management can open doors for many other careers and here we touch upon just a few of them. We shall start with the big one first – financial risk analyst/ manager type roles and then work our way down. This list is certainly not exhaustive, but I have tried to cover the main ones.
If you are looking for FRM exam preparation resources, check out this article:
Best FRM Prep Courses & Study Material (2022) ranked by Bankers
Financial Risk Analyst/ Manager
An FRM certification can open up quite a few career options for you, but the most obvious choice would be some sort of financial risk management role. That might seem like a narrow niche, but it is anything but that. Here are just a few of the many roles in financial risk that FRMs can and are being hired for:
- Credit Risk – The risk that a debtor does not pay you back. There are loans and bonds worth several trillion dollars out there and someone is crunching the numbers and calculating the risk of the issuers. Being a credit analyst is an ideal role for an FRM.
- Liquidity Risk – Liquidity is the ability to manage short term cash requirements for operational stuff. When you have billions of creditors and debtors with various credit risks, multiple loan maturities etc, this can get rather complicated. Who better to make things simple than an FRM?
- Operational Risk – These are risks arising from a company’s day-to-day operations. An operational risk analyst would aggregate, analyse and monitor these risks and coordinate with various divisions to manage them.
- Model Risk – Banks and other corporations prepare various models to better represent their current situation (in terms of inventory or credit risk etc) and to simulate future scenarios. Just having these models (which are approximations of reality), can introduce uncertainties which is called model risk. FRMs are well suited to manage such models.
- Portfolio Risk – A portfolio of unique assets can really add to the complexity of the overall risk profile of investments. These assets react in different ways to different events and can increase or decrease the risk depending on their correlations. It can all become a bit complex and you need someone to create a better picture of the portfolio level risk.
- Fixed Income Risk – The risks inherent in fixed income products like government and corporate bonds. Such assets are sensitive to credit events which can affect the risk of the issuer as well as interest rate movements.
- Derivatives Risk – Derivatives are assets that derive their value from other assets. Their risk profile, therefore, can have traits which make them very valuable for hedging or speculating. Either way, you need someone to quantify and manage the risk.
- Commodity Risk – Companies trading in commodities or using these commodities for their core business operations would do well to keep an eye on commodity risks. For example, airlines are totally dependent on the price of oil and automobile manufacturers are probably concerned about iron ore prices as well.
- Market Risk – This is the risk emanating from the market that a company operates in. For example, eCommerce is a market risk for brick and mortar stores because it is drastically reshaping the retail market itself.
- Regulatory Risk – This is not just about following all the written guidelines, but there is a fair bit of quantitative juggling too. For example, banks have to comply with a number of different financial stability ratios imposed by regulators like capital adequacy or sectoral exposures caps and so on.
This is just a small sampling of the various financial/ quantities risks that companies face. A Financial Risk Manager has to understand these risks, quantity them, analyse them for management and other divisions and monitor them on an ongoing basis. Since the 2008 crisis, the focus has increasingly shifted towards having adequate risk management. In fact, that was the catalyst that really compelled me to get an FRM designation too and it has served me well. Let’s look at some of the other roles now.
Enterprise Risk Management
Enterprise Risk Management (ERM) is a catch-all phrase that captures all the risks that can potentially prevent a company from achieving its business goals. It includes all of the risks specified in the section above and anything else that you can think of. However, the key difference is that ERM professionals look at all of these risks holistically and try to achieve a balance that is best suited for the organisation given its strengths and weaknesses. Essentially, ERM is a strategic function where the goal is to prioritize the biggest risks which need to be actively targeted and that might mean that some less critical risks have to be ignored.
An interesting aspect of ERM is that sometimes it might not be cost effective to actually try and mitigate a risk at all. It might make more financial sense to just leave it alone and not do anything about it other than monitoring it. This strategic level approach requires a sound understanding of all aspects of risk management like the ability to uncover new risks, find the root cause of such risks and decide what level of risk should be acceptable to the company. It is no wonder then that FRMs are considered to be valuable assets in the field of Enterprise risk management.
Investment Bankers do have to manage risks as a normal part of their job profile. Capital market transactions, leveraged finance, M&A etc. all have components of risk which needs to be managed, priced and accounted for.
Additionally, some investment banks have dedicated risk management teams which offer risk consulting as a specialised service to their corporate clients.
An FRM certification can be quite valuable for such roles, more so than the CFA at least.
Traders spend trillions every year investing in various securities ranging from equities and bonds to commodities and real estate. There is a risk component in each and every one of those trades. Whether it’s someone at home doing day trading as a hobby or a multi trillion-dollar fund, everyone is doing at least some level of risk assessment before making a trade. Most often, what determines success for a trader is not how good he is at picking stocks, but rather how well he can manage the risk of his portfolio.
As a Certified Financial Risk Manager, you begin to think of things with a risk perspective. This has nothing to do with being risk averse and everything to do with being aware of the risks and appraising risks appropriately. Each financial asset has an associated level of risk (even “risk free” government bonds are just free of credit risk, but the other risks still exist even for them) and a good trader is one who can see all the risks – or at least more than anyone else.
Wealth Managers/ Private Bankers are professionals who advise individuals on how to manage their finances or wealth. This includes things like estate planning, investments, how to manage capital gains and so on for people with sizeable assets. Risk management is a very crucial aspect here since risks can directly impact the financial well being of the client. Having sound investment knowledge is important, but I would definitely consider risk mitigation to be the primary focus at least for the majority of clients.
The first step in wealth management is to understand the client’s financial needs and goals. For most people nearing retirement age, capital preservation is more important than capital appreciation and that is where good risk management can add value. To be fair, a CFA of CFP should also be able to manage the risk appropriately, but an FRM designation is specifically tailored towards handling more complex risk situations and it will definitely add value to wealth management roles.
Investment Officer/ Asset Manager
Asset Managers/ Investment Officers (IOs), as the name suggests, are responsible for managing all the investment activities of their employer. For example, an IO at a university would be responsible for managing the endowment fund which could run into several billion dollars. Similarly, an IO at a company would be responsible for managing the investments of the pension fund. The role requires investment planning which invariably means that there is some level for risk involved in the decision-making process.
Managing such risks while maximizing returns for the fund is what an Investment Officer is primary expected to do. Although a CFA or other investment focused certification would also help, it can be argued that minimizing risk might be more important for certain entities, like the university endowment and pension fund examples that I provided earlier. Capital preservation is more important for such organizations and that is where a keen understanding of risk can be really handy.
Compliance departments, especially for banks, have never been subjected to such intense focus as they are now. International sanctions, large regulatory fines and the potential for significant reputational damage for banks has led to a zero-tolerance compliance policy. Risk management is an integral compliance aspect, not just in banking but across the board. For example, the compliance department for a trading division would monitor thresholds and allowances both internal and regulatory. It would monitor all trades and raise an alert if risk thresholds are crossing some pre-specified levels.
Even one-off deals have to be assessed for compliance with risk thresholds. For example, lending to a particular client might raise the sectoral exposure beyond the permissible value or taking on a contingent liability as the result of a contract might breach some other risk parameter. The point is that there a lot of quantitative risk thresholds that need to be monitored by the compliance team and a Certified Financial Risk Manager will undoubtedly add good value to such a role.
One of the primary end goals of any sort of audit function is to have better risk assessment and controls. While a CPA or ACA qualification would probably suit an audit role well, risk management experience would just be icing on the cake. Risk management is one of the key skills that an internal auditor should bring to the table.
Auditors are expected to gather and analyse corporate business data and test the controls that have been put in place. The FRM core curriculum definitely provides a solid base that can help an auditor better understand these controls so that he can make a fair assessment as to their effectiveness.
Regulations are changing faster than ever, industries are changing faster than ever and customer demands are changing faster than ever. This means that many companies, big and small, are just not able to keep up with the pace of change. This is where consulting firms come in and what they bring to the table are professionals experienced in a particular niche. For example, a consulting firm might have a team which just specialises in helping Western companies launch products in China and that is all that not-so-hypothetical firm does each and every day. These are the type of gaps that consulting companies try to fill.
Risk is a major area for consulting companies because its such a broad field. When you acquire a competitor, you need someone to do the due diligence. When you launch in a new country, you need someone to ensure regulatory compliance. When you want to import from a new partner, you need to make sure his financials and other things are solid. In all of these cases, and many more, it might make sense to get in touch with a risk consultant. The FRM course does touch upon regulatory aspects as well as quantitative aspects of risk management and would be a pretty solid CV boost for someone trying to get into risk consulting.
Credit Rating Agencies look at the overall financial and operational performance of a company, the competitiveness and growth prospects of the industry and other aspects in order to ascertain their creditworthiness. A company’s credit rating just represents the ability of the company to repay its debt obligations and the its determined through various credit risk models that these rating agencies develop and refine over time.
Credit Analysts look at things like Probability of Default, Loss Given Default, Exposure at Default and hundreds of other such factors using tools like stress testing and scenario simulations to reach a conclusion as to the credit worthiness of a company. This is another role where a Financial Risk Manager would find himself right at home.
Research (Equity, Macro-Economic etc.)
Research teams look at all the publicly available data and make predictions about future performance of stocks, companies, sectors and so on. They look at macro factors like interest rate, PMI data, GDP figures etc and company specific quarterly numbers and build models that can use this data to provide meaningful information. Research roles can be focused on anything from equity to macro-economic factors to commodities to real estate or other asset classes.
Research roles can be a challenging as they require a complex synthesis of all the available information and separating the noise from useful data. It requires the use of analytics, statistics, behavioural science, financial modelling, economic theory, risk management and a number of other quantitative disciplines. Irrespective of what you are you researching and why, a basic understanding of economics and risk management is indispensable. Research is also generally very quantitative and statistic heavy and that is something that it has in common with the FRM core curriculum.
Managing Retail Loan Portfolios
Retail loans include all mass market products that are sold to the general public. This includes things like credit cards, car loans, home loans, personal, loans and so on. An FRM would obviously NOT be approving individual credit card applications but rather look at things holistically. For example, higher default rates in a certain city or certain profession might signal structural issues and so on. The role of a risk manager here would be to build models to price these products accordingly and then evaluate their performance.
Managing a portfolio of retail loans is a combination of credit risk analysis, portfolio analysis, statistics and a few other disciplines. How banks and other companies make money here is by appropriately pricing these products for each customer. It is not about deciding who to give out a loan to, but rather at what rate should the loan be given to a particular customer segment based on the risk analysis. Products are then designed around these criteria and proper risk management is all that separates a healthy balance sheet from a repeat of the 2008 fiasco.
This article just gives a small sample of the hundreds of roles where an FRM certification holder would find themselves right at home. The TL;DR version is that if the role has at least some aspect of quantitative or even qualitative risk management, then an FRM designation would only help make your CV stronger for that role.
Over the last decade, risk management has been quickly gaining the importance that it deserves. The industry is moving from a wild west attitude towards risk management to a more scientific approach. This can only be good news not just for Certified Financial Risk Managers, but shareholders, employees and investors alike.
If you are a risk wiz-kid already, then the FRM exam should be a breeze for you. My experience is that FRM is a bit more quant-heavy than the CFA exam so put in some extra hours and feel free to subscribe to a training course. Here our my top picks:
Best FRM Prep Courses & Study Material (2022) ranked by Bankers
Alternative Risk Certifications
There are quite a few other risk certifications like PRM, CERA, CRM etc. However, if you are willing to commit 2+ years to studying, taking exams and fulling the work-experience requirements, I think it is best to pick FRM only.
But if you need something right away, here are some other recommendations that you may find helpful:
Best Risk Management Courses/ Certifications (2022) ranked by Bankers
- Best FRM Prep Courses & Study Material
- Bionic Turtle FRM Course Review
- Why Become a Certified Financial Risk Manager?
- Commercial Banking & Credit Analyst (CBCA) Certification Review
- Best Credit Analysis Courses