Sharpening the focus on risk in the Family Office

For nearly all family offices, the events of 2020 certainly didn’t kickstart the decade in the way they may have envisaged. In a year where the nation suffered both environmental and economic shocks, resilience was certainly put to the test.

While the depth of financial resources, combined with the maturity of the family’s social capital significantly contributed to overcoming the calamities of the year, importantly, the benefit of having in place an effective risk management framework emerged.

Whilst effective risk management has been a cornerstone of operations of the family business for generations, last year saw the importance of having a plan for risks that sit outside this scope. Now in a time of unparalleled change, enterprises need to double-down on these systems.

There are several reasons for this.

Wealth transfer planning

Recognising the importance of planning for inter-generational wealth transitions has highlighted the ‘risks’ to succession. Unless appropriate forethought and planning has been undertaken, wealth transition amongst generations isn’t transparent.

Failure to innovate and change

Secondly, failure to ‘change’ and innovate carries with it the ‘risk’ of dissipated energy. Often this leads to the ‘risk’ of inter-generational conflict as misunderstandings emerge as to how an individual and their family think their energy should be applied. This has become increasingly relevant not just in relation to how financial capital is managed, but also the way that individual family members discuss their own education and development as part of the family enterprise.

Privacy

Thirdly, even though the internet in many ways has liberated the transfer of information and knowledge which has in-turn encouraged innovation – it has also further jeopardised privacy. As a person or families’ success begins to become public knowledge, their level of cyber risk grows. It’s key there is a robust plan for security and social engagement. A family’s privacy can be protected in these from both third-party scrutiny and from its own failings and subsequent inadvertent publicity.

Family offices also need to develop their own risk management frameworks. The framework should include risks to achievement of purpose and mission, implementation of strategy, transition of ownership and wealth, capacity for change in leadership and control and allocation of ‘risk’ in portfolio management.

You can begin the process by understanding the risks your family faces and establishing a forum that allows discussion of what needs to be included.

It’s important, in doing so, to consult with family members about their own personal liabilities and identify where those risks may have an impact on wider family relationships. A prime example being discussions around the role of ‘binding financial agreements.

 

By prioritising risks, by likelihood and impact, family offices can begin to develop relevant mitigating strategies.

It is not the case that all risks can or indeed should be eliminated – the CIO will need to take a certain level of investment risk to maintain the capacity of the family’s financial capital to generate sufficient returns to meet the family’s needs. By creating an awareness of the nature of the risks facing the family and discussing what the impact of that risk is on a family’s future, collectively – the family office has fulfilled one its most important functions.

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