How Investment Companies Can Prepare for ‘The Big One’

Preparing for ‘The Big One’ isn’t just about earthquakes. Investment management companies, no matter where they’re located, should prepare for any kind of Big One, that is, an untimely and potentially devastating scenario.

Southern California recently experienced two of the most powerful earthquakes to hit the region in 20 years, and while major damage was limited to small towns a few hours north of Los Angeles, the question on the minds of many in LA, and California at large is, “Is this a preview of something bigger to come?”

“Are we prepared for ’The Big One?’”

For those unfamiliar, ‘The Big One’ in a California context refers to an extremely powerful earthquake that hits, some say, every 100-150 years. The last real Big One’s occurred in 1857 and 1905 in central California and farther north in San Francisco respectively, and based on those dates, the state may be overdue for one.

Are people’s homes prepared? What about businesses, including investment firms?

Preparing for The Big One as an Investment Firm

The Big One is absolutely a reminder of the power of Mother Nature, but this isn’t just about earthquakes.

The Big One, in the context of investment management, has a metaphorical meaning, too: being ready for any kind of untimely and potentially devastating occurrence. This is a message that applies to any firm, anywhere.

Whether it is the literal or metaphorical sense, be prepared.

How Investment Firms Can Prepare for an Actual ‘Big One’ Earthquake

Earthquakes are not just a California thing; pretty much any firm on the west coast of the United States and Canada can be at risk of a devastating earthquake.

Have Insurance

This should go without saying.

For starters, commercial property insurance is a way to protect your firm against a variety of ways your building and physical assets can be damaged or lost.

Make sure, though, the policy covers for specific events like earthquakes. Do not assume a basic policy covers everything. The last thing you want after the earthquake is to be reminded in the fine print that damage due to earthquakes was not included.

Have Emergency Items Ready

In the event of a major quake, it is possible that communications, roads, and access to necessities can be cut off for not an insignificant period of time.

The power may be down, emergency personnel may not be able to make it in time if someone is injured.

Having plenty of water, a first aid kit, flashlights, a radio, batteries, and some canned foods stocked away can never hurt.

Protect Sensitive Documents/Back Up Your Data

A collapsed roof or ceiling could crush hardware and computers. A burst gas line can send the building up in flames, taking with it paper documents. At that point, almost everything you need to conduct business can be gone.

Important documents stored only in paper format should be scanned and stored on a secure cloud network. Files and documents stored on local devices should be backed up and stored on said secure cloud network, too. (This includes data in your portfolio accounting system, assuming it is stored locally.)

Besides, it doesn’t take an earthquake to lose valuable data. Computers and hardware can crash on their own. Thieves or vandals could take and destroy everything. Overall, think about eliminating the risk associated with items stored at single physical locations.

Talk with Your Clients, Make Sure They are Financially Prepared

If you’re a financial advisor, think about what a devastating earthquake could mean for the clients’ personal finances.

Are your clients located in earthquake-prone regions? Are they financially ready should disaster strike? Do they have insurance?

As an advisor, you’ve probably discussed financial planning strategies around college funds for children and grandchildren, building a comfortable retirement fund, donations to charitable organizations, etc.

But have you discussed with them building a natural disaster preparedness fund? Are the clients properly insured for their own assets? Do you know if they already have emergency funds independently set up?

Whatever the case may be, consider offering a strategy to build their emergency fund, for however long of a period necessary. If they have something set up separately, offer yourself available to lend advice.

Consider Investment Opportunities

Sun Tzu, the Chinese philosopher and military strategist who authored The Art of War, once said, “In the midst of chaos, there is opportunity.”

Crisis = Threat + Opportunity?

In the Chinese language, the word for “crisis” is called wei ji. Wei means “threat,” and ji is assumed to mean “opportunity.” JFK famously stated a similar quote.

That quote and belief around the Chinese translation of crisis, while technically a mistranslation (ji does actually mean opportunity in this context), can be viewed as unintended wisdom and motivation for the masses.

But when thinking of a crisis in either example, you realize you have some agency to better your situation.

Just because you and your organization could be severely impacted by an earthquake, that doesn’t mean your investments should suffer a negative fate.

What goods and services will be in high demand leading up to or in the aftermath of a major earthquake? What can you invest in?

Earthquakes are unpredictable and out of your control. There is nothing wrong with taking steps to protect the financial interests of your clients and organization. Doing nothing could mean being left with nothing.

How Investment Firms Can Prepare for Non-Earthquake Related Big Ones.

A Severe Market Downturn

Was 2008 the real ‘Big One? Do you think something an even more severe downturn is coming?

Either way, is your firm prepared to withstand months, even years of losses?

It doesn’t take an expert investment manager to know these things, but here’s a reminder of the basics:

  • Have diversified exposure, hedge bets where appropriate.
  • Eliminate conflicts of interest that may result in putting too many investment eggs into a risky basket.
  • Minimize risk for older clients’ portfolios, which includes those planning to retire soon or those already living on fixed incomes.
  • Identify opportunity when to buy on the cheap.

If you haven’t already built up cash reserves for the business, make sure your firm has enough to last through a prolonged downturn. When the market has been treating the organization well, that’s the time store up.

Furthermore, look at ways to minimize current costs.

  • Can you automate or outsource non-revenue generating activities?
  • Can a new portfolio accounting system and turnkey services generate more efficiencies and reduce expenses?

A Data Breach

A market downturn is something out of your control, but when taking the proper security measures, you can avoid The Big One of cyber hacks.

A data breach would be devastating. Having sensitive details of your firm and clients exposed and in the hands of rogue actors puts your organization in a precarious situation. Either you pay the ransomware at a huge financial loss to your firm, or you risk the malicious use of data by hackers.

Data breaches would be hurtful in three major ways:

  • Lost revenue as a result of lost client trust; clients will take their business elsewhere.
  • Class action lawsuits, in which you are to pay any damages the client has suffered from as a result of the breach.
  • Being penalized by industry regulatory agencies, which could result in fines, the temporary or permanent revocations of certifications and licenses to conduct business, the closure of the firm, and, in the case of severe negligence, even criminal prosecution.

If a breach does happen, and per GDPR guidelines if you are operating within the European Union or you have clients in the EU (regardless of you having a business in the EU), you are required to report a breach to the relevant regulatory authorities within 72 hours.

There are a lot of things you can do that to prevent breaches, such as storing data on secure servers, using secure networks, VPNs, complicated passwords, and strict measures for account login verification.

There are also non-IT related ways investment firms can do protect themselves.

Multiple-Employee Turnover

Could there be a time when several key employees decide to leave the firm at once?

How will your firm cope with the departure of talented individuals who possess all the know-how? Are you currently vulnerable to key-personnel risk?

As an example, investment firm operations can be majorly disrupted by the departure of their star portfolio accounting expert(s). Daily reconciliation reports don’t get completed, performance reports may be inaccurate, data may be improperly inputted or omitted altogether. Until there are replacements, remaining employees will be overworked, which drives down productivity.

In the event you know team members will be leaving, allow for adequate knowledge transfer time.

  • Have documentation in place, updated and detailed.
  • Cross-train employees. When someone is out sick, on vacation, or leaves the firm for good, other employees can confidently fill in.
  • Think about working with third-parties that can take on activities that are non-core and where key-person risk is high.

Be Ready for the Big One, in Any Form

Earthquakes are a scary reminder of how good things and good times can be taken away from us in an instant. The only thing we can do is prepare and mitigate that risk, in whatever capacity possible.

At a deeper level, these untimely disasters are a reminder that The Big One doesn’t just come in the form of an earthquake. For investment firms, The Big One can come in the form of another major risk that could jeopardize your organization, wreaking havoc when not adequately prepared.

You can only hope The Big One, be it the actual earthquake or otherwise, never rears its ugly head, but if, and when, it does, you’re ready.