A family office’s central role is as a risk manager, says FOX in a new study, and this idea needs to be formalized to create the right focus for staff and clients.
“The importance of formalizing or recasting the central role of the family office as a risk manager should not be underestimated,” says the study, Building a Family Enterprise Plan to Deal with Future Uncertainty.
The premise of the study is that to maintain wealth across generations the family and their advisors “have to continuously evaluate the environment to identify and manage risks and seize opportunities.” It defines risk as both threats to wealth preservation and wealth creation opportunities.
The process of managing risk starts with moving the planning phase “from theory to action,” says the study, which involves finding out which issues keep the family up at night.
Another point the study makes is that practices on risk evaluation and management from the corporate world – which for a long time has viewed risk as something to proactively manage - can be translated into a family context. This involves the use of well-known risk mapping tools, for example.
Soft issues dominate
From looking at risk maps from families, FOX says “it is clear that the most significant threats to long-term wealth are often ‘soft’ or sensitive issues such as dominating personalities, economic inequality, or intra-family conflicts. These issues must be handled with care and may require the experience of a trained professional to address effectively.”
These issues also tend to vary depending on which generation is controlling the wealth, FOX says. For instance, generations one and two have to deal with the original patriarch or matriarch handing over control, which the report acknowledges can be uncomfortable for both parties as the younger generation may also feel uneasy with the responsibility.
“Families in these early generations are often searching for a governance system that will help them formalize their decision-making process and provide everyone with a safety net regarding future control,” says the report.