Evolving Risk Landscape For Family Offices – Dentons Study

Tom Burroughes

3 October 2024

The share of family offices taking an active approach to mitigating potential risks to their portfolios has increased since the pandemic year of 2020; however, a material number of families still lack robust ways of handling threats, a new report from global law firm finds.

The report examines risks that ultra-high net worth families face, both from their own ranks and because of the structures, teams, and outsourced businesses they work with. The report looks at cybersecurity, aviation, staffing arrangements, healthcare, and geopolitics, in addition to risks in the investment, financial and legal arenas.

Besides handling investments, bill payments and tax, a big part of what these entities do, or should do, is about “protecting the client” on fronts such as their reputations, physical and digital safety at home and abroad, and ensuring that the external staff employed are regularly assessed to maximise productivity and to mitigate any potential issues. As a sector holding trillions of dollars in assets, the stakes of getting risk management right are high.

“With the multitude of risks facing family offices today, we believe they need to take a comprehensive and holistic view towards risk management. This includes proactive monitoring, strategic planning, robust governance structures, cybersecurity measures, compliance protocols and contingency planning for various scenarios. In doing this, family offices need to consider risks which arise from both internal and external threats,” Edward Marshall (pictured), global head of Dentons’ family office, said in the study.

The 26-page report – The Evolving Risk Landscape For Family Offices – includes findings based on the views of more than 200 individuals at family offices from 33 countries. Most respondents (77 per cent) either work at family offices or are advisors to one or many family offices. By region, exactly half of respondents are based in North America, 32 per cent are in Europe, 13 per cent are in Asia and 4 per cent are based in the Middle East, with a small percentage from Latin America.

Reactive mindset
Among the findings, the study found that since a 2020 report, awareness of risks impacting family offices has improved dramatically.

However, the proportion reporting a “reactionary rather than preventative approach” rose to one in three from one in four.

“Family” is identified as the largest source of reputational risk. And only half of personnel in family offices take part in risk mitigation and security training; while four in five carry out pre-employment background checks on all personnel, only 37 per cent periodically reassess the security profile of employees.

The report also found that seven in 10 family offices see a greater risk of a cyberattack today, with the number of North American family offices suffering recent attacks rising to 25 per cent from 17 per cent in 2020. Surprisingly, only 31 per cent are confident that their risk management function is well developed. The respondents state that they rely on insurance as their first line of defence. Yet, a majority does not possess cyber insurance, noting a severe lack of understanding.

Personnel shortages
A paucity of personnel poised to handle IT/cybersecurity threats is a risk; a related risk is the difficulty of attracting and keeping talent.

And, in an example reflective of the ways in which UHNW individuals’ lives carry particular risks, the report looked at aviation, healthcare and physical safety as sources of potential concern. Some two-thirds of family offices operating private aircraft prefer to outsource certain functions to specialists; only 32 per cent have an emergency response plan to manage crises. Additionally, family offices in Europe and Asia are concerned about accessing healthcare services when needed (at least four in 10). What is even more alarming is that less than half of respondents regularly evaluate physical security risks in their organisation – a gap that should be proactively decreased.

Impact of current events
In today’s volatile world, it is perhaps unsurprising that more than half (55 per cent) of family offices worry about geopolitical instability. And yet only 17 per cent of respondents have clear plans and processes to mitigate the impact of such risks.

"In today's interconnected world, the impact of geopolitical events creates uncertainties for many family offices," said Vivien Teu, Dentons Hong Kong partner. "There is a clear need to apply a global mindset when considering these uncertainties and devising risk mitigation strategies."

Survey background
Nearly half (43 per cent) of the respondents are C-suite (such as CEO, CFO or COO), while 11 per cent are investment professionals, 10 per cent are portfolio managers and 5 per cent are investment committee members.

Single family offices are the most common type of family office for 62 per cent of respondents, while 27 per cent are at multi-family offices and 7 per cent are at family-owned operating firms which also manage the assets and/or affairs of the family.