How to Manage Third-Party Risk in Wealth Management

Wealth management firms use third parties to provide a variety of products and services —whether it’s fintech, data platforms, or cloud-based tools. While these third parties are essential for firms to provide the best client services, they also come with risks.  

Managing third-party risk maintains client trust, safeguards sensitive data, and protects your firm’s reputation.  

The Importance of Third-Party Risk Management in Wealth Management 

Confidentiality, compliance, and client trust are critical components in wealth management. It’s not uncommon for firms to hold complex client portfolios that require a wide range of third-party vendors.

Third-party incidents can cause wealth management firms to face regulatory scrutiny, financial loss, and reputation harm — compromising client trust. A proactive approach to managing third-party risk ensures your firm remains protected while also preserving client data.  

Third-Party Risks in Wealth Management 

Due to the complexity and broad range of services, wealth management firms face unique third-party risk challenges.  

Third-party risks in wealth management include: 

• Cybersecurity: Wealth managers access highly sensitive personal and financial data daily. This has become increasingly attractive to cybercriminals, particularly for high-profile clients. Your company’s cyber protections may be strong, but you’re only as strong as your weakest link. If a vendor with access to your data has cyber vulnerabilities, then your company has cyber vulnerabilities. 
• Data privacy: Data isn’t just at risk of cyberattacks — poor privacy management practices cause data leaks and compromises. Wealth management firms need to know how third parties protect data and comply with data privacy regulations.   
• Regulatory compliance: Wealth management firms — especially those registered as RIAs or broker-dealers — face oversight from the SEC, FINRA, and state regulators. For example, Regulation S-P requires financial institutions to ensure their vendors uphold the same standards for safeguarding sensitive data. 
• Reputational damage: In wealth management, a strong reputation is key to business. Clients may think twice before working with a firm with a history of data breaches, regulatory actions, or operational failures — even if a third party was at fault.  
• Technology and integration: As with many in financial services, many wealth management firms have aging technology and infrastructure — while also contracting with technology forward third parties. This introduces security and compatibility risks.  
• Business continuity: Clients aren’t happy when they can’t access their accounts, and regulators don’t like it either. Business continuity and disaster recovery (BC/DR) plans should account for third-party disruptions — especially for systems that support client transactions, portfolio management, or regulatory reporting. Good TPRM means understanding your vendor’s business continuity plans. 
• Best interest obligations: Your firm has a duty to act in the best interests of your clients. Even when your firm outsources to a third-party vendor, it’s still responsible for the vendor’s actions. Some third parties may pose a risk to your firm’s duty to act in the best interests of clients.  

Related: Types of Third-Party Vendor Risk 

How to Manage Third-Party Risk in Wealth Management 

Wealth management firms operate in a highly regulated and client-focused environment. That’s why it’s essential to have strong third-party risk management practices in place. 

Here’s how wealth management firms can manage third-party risks:  

• Assign ownership: Clearly assigning ownership — whether through a dedicated TPRM lead, compliance officer, or vendor relationship owner — is essential to ensuring accountability and risk visibility across the firm. If no one owns it, it won’t get done. 
• Build a third-party inventory: Identify all your firm’s third-party relationships. It’s helpful to work with departments like accounting to get a list of every product or service your firm pays for. Keep the inventory updated so your firm can maintain visibility of its third parties — especially those that interact with client data or play a role in financial planning.  
• Risk rate third parties: Highest-risk third parties require the most oversight in your  
  TPRM program. Evaluate each third party’s risk level — consider factors like access to sensitive information, impact fiduciary obligations, and regulatory/compliance exposure.  
• Perform due diligence: The amount of due diligence needed depends on the third party's risk level. Thorough due diligence of high-risk third parties covers financial health, information security/cybersecurity, business continuity and disaster recovery planning, and compliance.  
• Don’t overlook fourth-party risk: Your vendor’s vendor (aka a fourth party) can pose indirect risks to your firm, especially when it comes to data storage, processing, or customer-facing technologies. As part of your due diligence process, make sure critical vendors have a strong TPRM program too. 
• Manage third-party contracts: Include specific clauses in third-party contracts like compliance expectations, data privacy, termination rights, service level agreements (SLAs), and audit rights. Implementing and monitoring third-party contracts ensures your third parties act in your clients’ best interests.  
• Conduct ongoing monitoring: Regularly assess the third party’s performance, compliance, and risk profile. Set up periodic reviews, request updates to outdated documentation (like SOC reports), and monitor for red flags. Proactive risk monitoring ensures your firm can respond quickly to issues as they arise. 
• Allocate sufficient resources: Managing third-party risk requires resources, including staff and tools. Using a centralized TPRM platform can help wealth management firms automate due diligence, maintain documentation, and monitor vendor performance with fewer resources. 
  
  Related: Third-Party Risk Management Policy Template 

Successful wealth management is built on trust, discretion, and performance. Third-party oversight is a strategic necessity to maintaining client trust. Managing third-party risks helps firms better protect their clients, reputation, and operations.  

What does a successful third-party risk management program look like? Learn the six elements in this eBook.