A recent survey by Dentons, The Evolving Risk Landscape for Family Offices, reveals concerning gaps in family office risk management. It also finds that many family offices continue to underestimate potential threats to their firms. The report evaluated the current risk landscape for family offices and found that only a slim majority conduct risk assessments regularly, with one in three family offices operating in a reactionary rather than preventative manner. As a result, the firms are left playing catch-up and struggling to mitigate certain risks when necessary. Larger family offices, with a net worth of more than $1 billion, are more likely to possess a reactionary mindset. These firms are also more inclined to say that they underestimate risks, likely because they’re able to have more monitoring resources at their disposal and are, therefore, more aware of gaps in coverage.
Identifying Risks
The report identifies a lack of family concern/awareness as a critical challenge to insulating their offices from potential threats. For example, with cyber security attacks on the rise, only 31% of participants report having sophisticated risk management programs in place, and only 29% believe their training programs are sufficient. Insider risk is another threat to families, yet only 37% report periodically reassessing the security profile of employees. “[F]amily offices need to consider risks which arise from both internal and external threats. To properly address these risks, all stakeholders should be involved in this process,” said Rick Ross, partner at Dentons US.
Role of Human Capital
Families are also over-relying on technology to fill risk management gaps and, in turn, underinvesting in human capital development. Data shows that three in 10 family offices are short-staffed in critical areas such as IT/cybersecurity, general risk management and investment management. According to Mike McNamara, a partner of Dentons US and a former CEO, “Risk will be insufficiently assessed absent a proactive plan to intensively surround the situation with the right talent, internally and externally, and to do so today.”
Types of Risks
Global conflicts, political instability and natural disasters are all top of mind as we continue to witness these current events worldwide, including the ongoing conflict in the Middle East, historical flooding in Dubai and Russia’s ongoing invasion of Ukraine. Despite their existence and threat potential, these hazards rank dangerously low on the totem pole. According to the report, only 17% have “clear plans and processes to protect against these wide-ranging and potentially impactful unknowns.”
Family offices appear to be much better equipped and focused on investment, legal/regulatory, and financial risks. These three risk categories are the most developed regarding risk management processes and the most frequently flagged as a focus for improvement. The findings suggest that the more family offices understand a certain risk category, the more they can identify elements needing improvement. Nevertheless, challenges presented by fluctuating market forces bring the benefits of hiring external investment experts into sharper focus. Most family offices acknowledge the need for external support in this ever-evolving risk landscape; for example, 54% rely on external legal support to manage and mitigate risks.
A Proactive Approach is Needed
A key takeaway from the report is that family offices must recognize that human capital remains their most valued asset. An overhaul of risk management culture is also key to navigating both existing and emerging threats. As the report eloquently concludes, “a sense of urgency needs to be embedded into risk management culture because a wait-and-see approach is no longer viable.” A proactive approach will help close the gaps in risk management processes caused by both internal and external deficiencies.