Avoiding risk when hiring a finance risk manager
Last Updated: April 30, 2020
Risk management roles and responsibilities vary widely between firms and within various segmentations of the industry (buy-side vs. sell-side in particular). For better or worse it is a position that is often a catch-all for work that does not really fit into any other department, but with some risk measurement/monitoring/management related function as a core. Risk managers can be responsible for any of the following:
- Risk modeling
- Risk reporting (building automated risk reports)
- Maintaining relationship with trading desks as a liaison between the desk and management, and to inform risk analysis
- Risk monitoring
- Compliance monitoring
- Creating reports for marketing
- Building and formatting PPTs for other departments
- Data system architecture
- Risk technology oversight
- Risk commentary
- Technology project management
- Accounting oversight
In many cases, the role includes some undefined blend of these responsibilities and the risk manager is expected to wear a different hat, depending on the need of the day. Adding to the challenge is that the skills required for each of these responsibilities can be quite different. For example, someone who is a great risk modeler may be terrible at building automated risk reports, and vice versa.
This guide covers good practices for hiring into a risk management role and how to avoid common hiring mistakes. At the end of the guide, I’ve also included the questions I’d ask a bond portfolio risk manager with a focus on modeling.
Understand your role
One of the most valuable things you can do as a hiring manager is to understand and define the core competencies of the role. What will be the measures of success in this role? Do you need someone who can build great risk reports? Do you need a modeler? Do you need someone who can manage IT projects?
A great way to do this is to look through the Personal Values, Behavioral Competencies, Skills, and Technologies on Interview GPS and figure out which set of candidate attributes best maps to this role. You do not need to select a lot, just the most important ones.
One of the most common mistakes that we’ve seen is hiring good risk modelers for what is really a risk reporting / catch-all role. By carefully defining the role and responsibilities you significantly increase the odds of finding a better match for the position.
Ask relevant questions
Many finance interviewers, and especially in risk management, like to ask difficult technical questions that are more helpful in making the interviewer feel smart than in selecting the best candidate.
If the primary responsibility of the role is to make great risk reports, then you probably don’t need to ask questions about risk modeling, option formulas, etc. You probably do not need to ask any algorithm questions or brain teasers either. You don’t want to reject a great report builder because he/she couldn’t answer questions about the LIBOR Market Model.
Similarly, if you are hiring someone to focus on modeling, then don’t confuse the process by asking questions about risk reporting.
Your questions should map to the candidate attributes you’ve defined. For example, at the end of this guide, I’ve included some questions for market and bond portfolio risk management.
Determine which areas are "must haves" vs. "learnable"
More often than not, you will find candidates who check some of the boxes in the role you’ve defined but not others. Here it is important for you to figure out which areas are must haves, and which can be learned.
For example, if the role requires risk modeling and risk reporting, you will likely find candidates who may be great in one and weak in the other. To what extent are each of your candidates who are good risk modelers able to become good risk reporters and vice versa? You may find that it is much harder for someone who is a good risk reporter to pick up modeling vs someone who is good at modeling to pick up risk reporting.
To help differentiate which risk modeler would be best at picking up risk reporting you may want to add behavioral competencies like coachability to your set.
Stay organized and objective!
This really applies to any interview but is especially true in vaguely defined roles such as risk management. It is extremely easy for personal biases to dominate the decision process which can lead to suboptimal hires. Interview GPS can help you organize the requirements for your role, choose the appropriate interview questions, and objectively evaluate candidates. Ultimately, it will decrease your chances of a poor hiring decision. Now that’s some good risk management!
Below are the questions I recently used to hire a risk manager for a bond portfolio that needed a focus on modeling. I use different questions for roles that are more focused on reporting, other kinds of instruments, etc.
Criteria this guide covers
Interview GPS organizes questions by personal values, competencies, and skills. Click a criteria to explore more questions
|Attention to Detail||Achieves thoroughness and accuracy when accomplishing a task through concern for all the areas involved|
|Curiosity||Pushes to get to root causes, asks critical questions, and ‘takes things apart’ to see how they work|
|Dependability||Reliable and dependable in performing job-related tasks, finishing assigned projects, meeting deadlines, and appointments|
|Prioritization||When juggling multiple tasks, decides which ones need to be tackled immediately, and which ones can wait|
|Bond Portfolio Risk Management||Risk management of a portfolio of bonds (corporate + govt).|
|Market Risk Management||Market risk of a financial portfolio.|
How would you compute the Sharpe ratio of a portfolio that has 6 months of daily returns?
This is a good question to ask when hiring for a role that will require some financial data analysis. It primarily checks the level of exposure and experience of a candidate to working with financial data and in particular calculating one of the most prevalent metrics of portfolio return. This checks:
- Is the candidate familiar with the details of the Sharpe ratio formula? Knowing a specific formula is not that important of course but this ratio is so prevalent that not knowing the definition may be a red flag.
- Has the candidate worked with fund returns in the past to compute this ratio? Someone who has would likely be able to give an immediate answer to this question.
- If the candidate has not: do they have the toolkit to figure out and justify a good way to estimate this ratio (whether or not their method matches with the industry standard is not super important).
Draw a graph that represents the price vs yield relationship of a bond. How does this change for a callable or putable bond?
This is another question that checks for bond math exposure, experience, and in some cases critical thinking.
Any candidate with basic bond math familiarity should be able to instantly produce the price vs yield graph. If a candidate is also able to instantly produce a graph for a callable or putable bond, then it’s a good sign that they have more advanced exposure to bond risk. If they do not already know the relationship, can they think through how an embedded call or put would affect the graph? No formula manipulation is required to solve this, just some reasoning on how an embedded option would impact the bond price for a given yield.
What measures would you look at to evaluate the risk profile of a bond portfolio?
This is a question for a more senior risk management role that focuses on risk measurement, monitoring, and management of a credit or bond portfolio. It is quite open ended and meant to start a back and forth discussion on credit risk. Click on the question above to see some possible answers and for a suggested rubric on how to evaluate a candidate’s response.
Tell me the last time you had to admit you made a mistake at work. What was the mistake, who did you tell and what was their reaction? What did you learn?
Mistakes are inevitable. You want to make sure your risk manager provides transparency, communicates mistakes effectively, and always works with integrity.
See the linked question instructions for my favorite follow up questions. Here's a couple of my favorites: how did you decide the mistake needed to be reported/escalated? How did you decide who to inform and why?