Family office insights this week:

• Family office risks: what can go wrong and how to stop it

• An interview with a family office CEO

• Books: how an inheritance can pull a family apart

• The challenges and idiosyncrasies of family office recruiting

• How many family offices have websites (poll results!)

Are Family Offices a Toxic Cocktail of Risks?

A recent study by the law firm Dentons suggested that family offices face a toxic cocktail of risks.

A complex and dangerous set of risks can jeopardize the stability and success of family offices. Today it’s a look at some of the key risks and the ways in which family offices are mitigating them.

The Key Risks

1. Cybersecurity Threats ⚠️

With smaller teams but vast wealth under management, family offices are often seen as a soft target.

Increased Vulnerability: The digital age has brought unprecedented convenience but also significant risks. Family offices are increasingly targeted by cybercriminals due to the levels of wealth and sensitive information they manage.

The Dentons report reveals that more than 70% of family offices believe they are more likely to suffer a cyberattack now than a few years ago. Despite this, only 31% have robust cybersecurity processes in place.

Inadequate Training and Awareness: Just 29% of family offices believe their staff’s cybersecurity training is sufficient. This gap leaves them vulnerable to phishing attacks, ransomware, and data breaches.

Without regular training and updates, even the best technology can fall short.

Lessons: Family offices should adopt a proactive cybersecurity strategy 

Regular Audits and Simulations: regular cybersecurity audits and simulation attacks help identify and assess vulnerabilities. Family offices should engage external experts to ensure that all potential entry points are secured.

Invest in Staff Training: all staff members, including family members, should be regularly trained on cybersecurity best practices. Awareness and preparedness are key to preventing breaches.

2. Insider Threats 🕵️‍♂️

Human Weakness: People are often the weakest link in the security chain.

Family offices face significant risks from within, as employees or even family members can become sources of reputational or financial harm. Dentons highlight that only 37% of family offices periodically reassess the security profile of employees after hiring.

Family offices work on trust, but that trust can lead to complacency and that can lead to breaches or fraud.

Lessons: Family offices should strengthen insider threat programs 

Ongoing Monitoring: continuous monitoring of employees’ security profiles should be implemented, not just at the point of hiring. This should be complemented by a comprehensive insider threat program that includes regular risk assessments and security training.

Develop a Culture of Security: security should be ingrained in the office culture. Open communication about potential risks should be encouraged. All staff should understand the importance of safeguarding sensitive information.

3. Geopolitical Instability 🌍

Global Turbulence: Family offices are not immune to the broader geopolitical landscape. Conflicts, such as those in Ukraine and the Middle East, as well as rising tensions in Asia, present significant risks.

The Dentons report shows that only 17% of family offices have clear plans to protect against these threats. This lack of preparedness can have severe implications for asset protection and operational continuity.

Complacency in Risk Management: A reactionary rather than preventative approach is common in family offices, with many family offices underestimating the severity of geopolitical risks. This mindset can lead to missed opportunities and increased vulnerabilities.

Lessons: Family offices should prepare for geopolitical risks

Scenario Planning: scenario planning and war gaming can be used to prepare for potential geopolitical disruptions. This will help the office develop strategies that can be quickly implemented in response to global events.

Diversify Investments: diversifying investments geographically can help mitigate the impact of regional instability, hedging geopolitical risks.

4. Talent and Human Capital Risks 👥

Staff Shortages: The report reveals that 30% of family offices are short-staffed in critical areas like IT, risk management, and investment management.

This shortage strains existing staff and weakens the office’s ability to manage risks effectively.

Difficulty in Attracting and Retaining Talent: Family offices often struggle to attract and retain top talent, which can impact effective risk management.

With a third of offices reporting increased difficulty in employee retention, this issue compounds other risks, leaving the organization vulnerable to both operational disruptions and security breaches.

Lessons: Family offices should address talent gaps with strategic hiring and training

Invest in Human Capital: human capital should be viewed as a critical asset. This means investing in competitive compensation packages, ongoing professional development, and succession planning to attract and retain top talent.

Utilize External Expertise: Where internal expertise is lacking, family offices should not hesitate to bring in external professionals. This can help fill gaps in risk management, cybersecurity, and investment strategy.

5. Investment Risks 💰

Market Volatility: The investment landscape is fraught with risks, including market volatility, illiquidity, and the potential for significant losses. Dentons report that only half of family offices have a formal investment policy or committee structure

Lack of Risk Monitoring: Many family offices do not holistically monitor investment risks across asset classes or track the interconnection of risk factors. This can lead to poorly informed decisions that might jeopardize the family’s wealth.

Lessons: Family offices should enhance investment risk management 

Formalize Investment Processes: formal investment policies and committee structures should be established to ensure a disciplined approach to managing investment risks.

Holistic Risk Monitoring: systems that monitor risks across all asset classes and actively track the interconnections between different risk factors should be implemented. This will provide a more comprehensive view of the investment landscape and help mitigate potential losses.

6. Under-insurance and Inadequate Coverage 🛡️

Gaps in Cyber Insurance: Despite the growing threat of cyberattacks, only 37% of family offices globally have adequate cyber insurance. The level of exposure is worrying.

Trustee Insurance: Trustee insurance is often a blind spot for family offices. A lack of trustee insurance can expose family members or other trustees to significant personal liability.

The Dentons report shows that 60% of family members serving as trustees do not have insurance, often due to a false sense of security or cost concerns.

Lessons: Family offices should ensure adequate insurance coverage 

Review and Update Policies: insurance policies should be reviewed regularly to ensure they cover all potential risks, including cyber threats and trustee liabilities. Insurance brokers should be engaged to tailor coverage to the specific needs of the family office.

Align Coverage with Risks: family offices should ensure that the level of insurance coverage aligns with the financial risks the family office faces. This will provide a safety net in the event of unforeseen circumstances.

Turning Risks into Opportunities

Dentons have highlighted that family offices face a daunting array of risks that, if not managed properly, can lead to catastrophic outcomes. From cybersecurity threats to insider risks, geopolitical instability, and talent shortages, the challenges are numerous and complex.

But by adopting a proactive approach, strengthening internal capabilities, and leveraging external expertise, family offices can turn these risks into opportunities for growth and resilience.

Family offices should recognize the urgency of these threats and take decisive action. The stakes are high, but with the right strategies, they can address the toxic cocktail of risks and secure the future for generations to come. 🌟

The Evolving Risk Landscape for Family Offices: A Dentons Survey Report is available in full here.

𝕏 highlights

I’ve spoken to some very smart people this week who can see the future.

Executive pay at family offices.

A teaser for next week’s newsletter.

 💼 where to work

Three notable family office job opportunities currently open…

Accountant - Perot Investments (Texas / Single Family Office)

VP of Portfolio Analytics & Risk - Lazard Family Office Partners (New York / Service Provider)

VP Portfolio Advisory - $30bn Private Family Office (New York / Multi-Family Office

📚 what to read

A contemporary novel about a family and their inheritance, which they call "The Nest." The novel explores how the anticipated inheritance shapes the lives and relationships of four siblings, and what happens when it is threatened.

📻 what to listen to

This episode of the Wealth Actually podcast sees host Frazer Rice interviewing Brian C Adams of Mack International, a leading executive search agency about the challenges and idiosyncrasies of family office recruiting.

📺 what to watch

An interview with Sandy Schwartz, CEO of the Cox Family Office

And finally…

Last week I asked if your family offices have a website. More than 70% don’t.

This comes as no surprise. While family offices are slowly opening up, a public facing website can compromise privacy. It can also lead to some of the threats outlined above.

For the same reasons, the majority of family offices do not have social media accounts under their own name.

Next week’s newsletter: The 5-minute Guide To Family Office Software

It kicks off a deeper look at the emerging sector of family office tech.

Family Office Buzz will be back on Monday (here’s the last edition if you missed it) with more of the best content on family offices and beyond.

Until next week, see you on 𝕏 or LinkedIn

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