The report – mostly based on US family offices, but with some in other nations – said there is a culture of underestimating threats. This is particularly important at a time when family offices, once little understood in the mainstream media, are getting more attention.
A study of 200 family office executives, mostly in the US with some in other countries, finds that more than two-thirds (70 per cent) of them haven’t “stress tested” risk management plans to deal with threats such as data theft, health conditions, fraud, kidnapping and business breakdowns.
At a time of rising interest rates, geopolitical risks and massive wealth transfer, FOs must address these hazards, argues Dentons, the global law firm. The Covid-pandemic also was a wakeup call, it said.
While they oversee trillions of dollars of assets, family offices often lack the specific resources and skills to stay on top of threats. With cybersecurity and other risks on the rise, this isn’t wise, Dentons said.
Such a report also shows how – as SFOs become more high-profile for investment and regulatory reasons, and with more (sometimes hostile) political focus on the "rich" – these institutions need to step up their game.
A senior advisor at the law firm, Kevin Hulbert, is quoted in the report as saying: “Family offices sometimes fall through the cracks of being big enough to be specifically targeted, but not having in place the strong risk management measures typical of bigger organisations, hence leaving them very vulnerable.”
In a 15-page report, Dentons identifies risks and consequences such as: property damage; disclosure of sensitive information; health conditions/death; business disruption; identity theft; kidnapping or stalking; workplace violence; regulatory penalties or lawsuits; loss of investments; financial or liquidity issues; tech or operational failure; crises or damage to reputation; burglary or robbery; fraud and embezzlement; theft of intellectual property; and assault.
The study examines the internal resources that family offices might be able to call on, as well as external sources.
“A change in mindset is needed at many family offices, which either underestimate threat levels (47 per cent) or are complacent about risks (41 per cent). Limited staff, as well as an emphasis on cost and convenience, are other obstacles to better risk management,” the report said in its examination of areas such as cybersecurity. Switching to the pandemic’s lessons, it said: “Almost three-in-ten family offices (29 per cent) did not have a business continuity plan in place before the Covid-19 pandemic. And over a quarter (27 per cent) said implementing secure remote working protocols is one of their top risk management challenges.”
Fail to prepare, then prepare to fail
“Our data reveals that while family offices are aware of the numerous threats they face, many are not incorporating regular stress testing into their overall risk management strategy,” Edward Marshall (pictured), global head, family offices and HNW group at Dentons, said on his LinkedIn page about the study. “This oversight could result in family offices overlooking a vital technique to assess the strength and resilience of their risk management practices.”
“The spectrum of stress testing methods is broad, extending from rigorous computer-simulated analysis to more straightforward, low-tech solutions,” Marshall said. “A family office could, for instance, use a seasoned risk consultant to facilitate a formal `What If’ conversation to discuss strategies and responses to various scenarios.
“Regardless of the method chosen, the outcome is invariably beneficial: the family office emerges with updated contingency plans and identified opportunities to fortify against existing vulnerabilities. These assessments also provide a forum for family members to discuss their individual risk tolerances and uncover ways to better protect against potential reputational, regulatory, legal, and geopolitical pitfalls.”
Data for the study was collected from 25 May to 10 August 2020. Most respondents were single family offices and described themselves as traditional SFOs. The majority of them had between $100 million and $5 billion in net worth (2 per cent of family offices did not disclose their net worth).
Geographically, family offices were concentrated in the Northeast and Southern states of the US with 9 per cent being international responses (Australia, Brazil, Canada, Europe, Germany, Hong Kong, Italy, Mexico, Peru, Portugal, Singapore, South Africa and UK).
As a reminder, this news service is exclusive media partner with Highworth Research, a database covering the world's SFOs. To register for a free trial, click here.
See here for another feature about Dentons and the work it does in the family offices space.