Strategy
Navigating Disasters In Single-Family Offices
The author of this article – a member of this publication's advisory board – has examined some of the lessons that need to be learned in light of a run of disasters, such as North Carolina floods, storms in the US Southeast, and most recently, the massive fires in Southern California. The lessons are global.
(An earlier version of the following article appeared first in Family Wealth Report, sister news service to this one. While the examples are drawn from North America, the lessons are universal.)
For many readers and their clients, the past 12 months have
thrown up a number of natural disasters (with government and
private activity arguably making situations worse, although not
always). As we write, people across Southern California, for
example, are struggling in the aftermath of the fires that
devastated neighbourhoods, rendering tens of thousands of people
homeless and raising questions about issues such as woodland
management, water supply and disaster preparedness. Big storms
hammered Florida last year, as well as parts of North Carolina
and adjacent areas. This clearly adds to concerns about the
impact of climate change and human impacts, for example, on
water runoff, building density, and so on. Insurance
coverage is also becoming an increasing problem.
There is never, arguably, an ideal time to reflect on the
lessons, and the editors are aware of the sensitivities involved
when people are still trying to put their lives back together. At
some point, however, certain lessons need to be absorbed, if only
to try and prepare for what’s ahead. We cannot think of a
more suitable person to grasp the issue than Matthew Erskine
(pictured below), a regular contributor to this news service and
editorial board member. He is managing partner at his eponymous
law firm, Erskine &
Erskine. As always, the usual editorial disclaimers apply. We
invite readers to respond. They can contact the team at tom.burroughes@wealthbriefing.com
and amanda.cheesley@clearviewpublishing.com.
Matthew Erskine
Recent global events, from economic instability to natural
disasters and pandemics, have underscored the importance of
comprehensive planning for single family offices. These
organisations, tasked with managing the wealth, legacy, and
affairs of high net worth families, face unique challenges when
navigating crises. Disasters – whether they be economic
downturns, political upheavals, regulatory changes, or even
family conflicts – can significantly impact the ability of family
offices to meet their objectives.
An object lesson for family offices is the devastation in Florida
from Hurricane Helene quickly followed up by Hurricane Milton,
one of the most powerful storms on record. Additionally, the
recent catastrophic fires in the Los Angeles region, which
resulted in widespread property damage and displacement, serve as
another stark reminder of the need for proactive and robust
disaster planning. These events highlight the critical importance
of applying the principles of “Disaster Theory” to create
strategies that ensure wealth, legacy, and family values endure
for generations to come.
Understanding disaster theory for single-family
offices
Traditionally, Disaster Theory has been used to help
organisations manage responses to catastrophic events. However,
the same principles can be adopted for single-family offices to
help them anticipate, respond to, and recover from various forms
of disruptions. These disruptions are not limited to external
shocks like economic crises or regulatory changes, but also
include internal challenges such as generational transitions,
family disputes, or leadership transitions.
Learning from the past: Identifying hazards and
mitigating risks
A core tenet of Disaster Theory is hazard identification. For
single-family offices, the risks they face are often as much
about maintaining family harmony and values as they are about
managing financial and regulatory risks. Key areas of
vulnerability might include:
-- Succession failures: A failure to plan for smooth leadership
transitions can lead to family disputes and financial
mismanagement;
-- Concentration of wealth: Over-concentration in a single asset class, industry, or geography can expose the family to significant risk during downturns;
-- Regulatory and legal changes: Family offices operating globally must remain vigilant to shifting regulatory frameworks that could impact wealth preservation strategies, such as changes in tax law or cross-border regulations;
-- Family conflicts: Emotional entanglements within families can severely disrupt decision-making and governance, especially when issues of control or legacy come into play;
-- Geographic vulnerability: As highlighted by the fires in
Los Angeles and hurricanes in Florida, geographic concentration
of assets or operations in disaster-prone regions can amplify
risk exposure.
By understanding the hazards that have threatened similar
organisations in the past, family offices can better prepare for
the future. In the face of these risks, single family offices
must take a proactive approach by implementing mitigation
strategies that align with both family goals and financial
realities.
Disaster Theory emphasises the need for structures and systems
that allow for adaptability and resilience:
-- Governance structures: Clear, formal governance structures are
essential in separating family dynamics from business operations.
This helps prevent emotional decision-making from overriding
long-term financial strategy;
-- Diversification of investments: Mitigating financial risk through diversification across asset classes, industries, and geographies can shield the family from sector-specific downturns, geopolitical risks or natural disasters.
-- Succession planning: Developing and communicating a transparent succession plan ensures stability across generations, reducing uncertainty and conflict;
-- Scenario planning and stress testing: Preparing for
different economic, political, and environmental scenarios
through stress testing of portfolios can help family offices
respond to unforeseen crises more effectively.
Adapting to the present: Response and recovery during
crises
Disaster Theory also highlights the importance of decisive action
during crises. For single-family offices, this means not only
managing the immediate financial implications of a disaster but
also addressing the emotional and relational dimensions of the
family. The fires in Los Angeles revealed the importance of
having plans in place to protect physical assets and ensure the
safety of family members during natural disasters. Key response
mechanisms include:
-- Crisis management teams: Family offices can benefit from
having designated crisis management teams that can swiftly
implement recovery strategies during critical times.
-- Flexible decision-making: The ability to pivot and adapt during a crisis – whether by reallocating assets, liquidating non-performing investments, or taking advantage of market opportunities – can prevent long-term damage; and
-- Communication protocols: Clear and consistent communication with family members is crucial to maintaining unity and trust during periods of instability. Recovery, in the context of family offices, isn’t just about restoring financial health. It’s also about ensuring that family relationships, legacy, and long-term goals remain intact.
Recovery should focus on:
-- Strengthening family cohesion: Crises often present
opportunities to strengthen family bonds and redefine shared
goals; and
-- Reassessing investment and governance structures:
Emerging from a crisis may require significant changes to
investment strategies or governance structures to prevent similar
vulnerabilities in the future.
Anticipating the future: Building resilience
capacity
Building long-term resilience is essential for family offices.
Disaster Theory emphasises the importance of resilience through
continuous adaptation and planning for the future. Single-family
offices can build this resilience by:
-- Integrating family values into business strategy: Aligning the
family’s wealth management strategies with its values can foster
unity and long-term commitment across generations;
-- Adaptive planning: Using scenario planning to anticipate future challenges – from regulatory shifts to market disruptions – can give family offices a competitive edge in a rapidly changing world; and
-- Emphasising socio-emotional wealth: A focus on
socio-emotional wealth – the non-financial aspects of family
businesses, such as legacy, emotional connection, and identity –
can help families stay committed to long-term goals even in the
face of adversity.
Conclusion
For single-family offices, the principles of Disaster Theory
offer a powerful framework for ensuring not just survival, but
long-term success. By identifying risks, developing robust
mitigation strategies, and building resilience, family offices
can protect both their financial assets and their family
legacy.
The fires in Los Angeles serve as a poignant example of how
natural disasters can profoundly impact family offices,
underscoring the necessity of proactive planning and
adaptability. The world of family wealth management is fraught
with uncertainty, but with a well-crafted disaster plan,
single-family offices can emerge stronger from even the most
disruptive events, ensuring that their legacies are preserved for
generations to come.