A recent survey from Dentons, The evolving risk landscape for family offices, reveals gaps in family office risk management. It also finds that many family offices continue to underestimate the potential threats to their firms. The report assessed the current risk landscape for family offices and found that only a small majority carry out risk assessments regularly, with one in three family offices operating in a reactive rather than proactive manner. As a result, firms are left playing catch-up and struggling to mitigate some risks when necessary. Larger family offices, with a net worth of more than $1 billion, are more likely to have a reactionary mindset. These firms are also more likely to say they underestimate risks, likely because they are able to have more monitoring resources available and are therefore more aware of gaps in coverage.
Identification of risks
The report identifies a lack of family concern/awareness as a critical challenge to insulating their offices from potential threats. For example, with cybersecurity attacks on the rise, only 31% of participants report that they have sophisticated risk management programs and only 29% believe their training programs are sufficient. Insider risk is another threat to families, yet only 37% report periodically reassessing their employees' security profile. “(F) family offices must consider risks arising from both internal and external threats. To properly address these risks, all stakeholders must be involved in the process,” said Rick Ross, partner at Dentons US.
The role of human capital
Households 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/cyber security, general risk management and investment management. According to Mike McNamara, a Dentons US partner and former CEO, “The risk will be underestimated in the absence of 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 around the world, including the ongoing conflict in the Middle East, the historic floods in Dubai and Russia's ongoing invasion of Ukraine. Despite their existence and threat potential, these risks rank dangerously high 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 in relation to risk management processes and most often noted as a focus for improvement. The findings suggest that the more family offices understand a particular risk category, the more they can identify elements that need improvement. However, the challenges presented by fluctuating market forces bring the benefits of hiring outside investment experts into sharper focus. Most family offices recognize 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 point from the report is that family offices must recognize that human capital remains their most valued asset. A review of the risk management culture is also key to navigating both existing and emerging threats. As the report eloquently concludes, “a sense of urgency must be embedded in the risk management culture because a wait-and-see approach is no longer viable.” A proactive approach will help close gaps in risk management processes caused by internal and external deficiencies.