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:
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:
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