Risk Management | Generational - Multi Family Office

Risk Management

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 complex financial capital market products. How easy investment products are to understand, proximity to the investments and the possibility to have a real influence on the investment are more sought after now than ever before. 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, a further professionalization of family office services is taking place in processes such as manager selection and due diligence of direct investments, or a more stringent controlling of portfolio managers.

Consequently, risk management and investment reporting and controlling have gained importance following the global financial crisis (GFC). 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.

Key risk areas

Systemic and global risks clearly impact family wealth in a significant way. The following parameters provide the core of a portfolio risk analysis framework:

  • Identify which factors could destabilize your portfolio and affect your diversification
  • Capture “blind spots” and “hidden” diversification risks
  • Avoid the case of seemingly uncorrelated assets moving in the same direction during corrections
  •  Focus on “imperfect” knowledge
  • Initiate critical analysis and reflections of potential impact on asset allocation decisions

Risk management systems

Risk, return and liquidity are the foremost issues to be considered in any investment decision and asset allocation process. These prerequisites will be the basis for the risk management system, which in itself will cover risk mitigation and cost reduction and may lead to value creation. These factors include:

Risk mitigation

  • Identify and address key risk areas that matter
  •  Effectively assess risks across the family office, driving accountability and ownership
  • Manage and mitigate mission-critical risks
  •  Establish comprehensive risk frameworks

Cost reduction

  • Cost-efficiencies are a critical part of setting up a family office
  • Implement an automated risk management process to materially improve the cost structure
  • Reduce cost of control spend through improved use of automated controls
  • Streamline or eliminate duplicative risk activities
  • Improve process efficiency through continuous monitoring

Value creation

  • Achieve superior returns from risk investments
  • Improve control of key processes
  • Combine risk and control management to improve performance
  • Use analytics to optimize the risk portfolio and improve decision-making

A risk management process is vital to the family office structure in order to formalise the approach to risk relating to the family wealth.

Risk management process

Risk review

  • Define a common understanding of the risk level among family members | which level of risk is acceptable?

Risk identification

  • Establish a detailed risk identification process
  • Identify and document qualitative and quantitative risks
  • Define the main drivers of volatility of the main asset classes | investments

Risk measurement

  • Measure impact of risks on investment decisions
  •  Prioritize risks according to impact level and likelihood of occurrence

Risk reporting

  • Include relevant and sufficient level of information in regular reporting
  • Establish family governance to deal with the risk management

Risk mitigation

  • Establish measures to mitigate at least the top priority risks
  • Chances need to be identified in the same way as risks
  • Establish regular monitoring of the family risk landscape
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