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Family Office – Risk Management

Maintaining family wealth across generations is extremely complex. The recent global economic difficulties were unprecedented, and many families with significant business assets or private wealth are now looking to stabilize their wealth against this background. For wealthy families in Europe, the uncertainty and volatility resulting from legal, fiscal and political difficulties, coupled with the weakness of the Euro, have added to their problems. Many have been concerned with risks such as permanent loss of capital, counterparty and credit risk, and lack of liquidity. Consequently, with the aim of securing their family legacy over generations they have changed their perception of risk and the definition of risk itself.

The financial crisis of 2008-09, and the fallout from it, has led families to reconsider their approach and behavior towards risk. In broad terms, there has been a shift from too much risktaking before the crisis to too little afterwards. Such subjective perceptions of risk can only be avoided through a stringent and structured risk management process focusing on long-term goals. Furthermore, there is a greater requirement today for additional due diligence procedures for large investments, as well as a desire for more transparency during the investment process.

Against this background, family offices need to complement their existing standard risk measures with additional techniques, such as using additional portfolio analysis tools combined with scenario analyses for different asset classes. The risk management function within the family office is increasingly moving away from a mere controlling role to a time-critical, strategic advisory role. This trend also has a significant impact on make-or-buy decisions in the family offices.

This new demand for risk transparency has led to the desire to invest more in direct investment opportunities and in real assets, rather than in complex financial capital market products. The ease of understanding investment products, proximity to the investments, and the possibility of having a real influence on the investment are more important now than ever. Long-term investments with lower volatility and a moderate expected return are more often combined with short- to mid-term investments with a significantly higher risk profile to achieve outperformance. As part of this process, the further professionalization of family office services is taking place in processes such as manager selection and due diligence of direct investments, and more stringent controlling of portfolio managers.

Risk management and investment reporting and controlling have thus gained in importance following the financial crisis. Market participants typically say that an optimal diversification or asset allocation strategy, combined with active and highly flexible portfolio-management, are the cornerstones of a solid risk management process.

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