Four critical strategic risks faced by family offices

As the world continues to become more interconnected, global risks can have a significant impact on families, particularly large, multi-generational families with related business and investment interests. Among the strategic risks faced by these families are natural catastrophes, rising wealth, generational shifts, and cyber risks. A combination of these risks, coupled with macroeconomic and social trends, are prompting an evolution among the advisors and family offices that serve them.

1. Natural catastrophes

Record-breaking wildfires, hurricanes, and floods in recent years are just a few examples of how high-impact natural hazard-driven catastrophic events are becoming more frequent. The 2020 Global Risks Report, published by the World Economic Forum with support from Marsh McLennan, notes that three of the top ten risks expected to increase this year are related to environmental catastrophes. 

Severe natural disasters pose major threats for family offices, especially those managing either personal or business-related assets situated along the coast or other high-risk areas. Environmental catastrophic events do not discriminate between personal and commercial assets. Mitigating the potential catastrophe exposures of a family’s business holdings as well as their personal property is a significant strategic concern.

2. Growing wealth and expanding families

As a family’s aggregate wealth grows, they are likely to encounter the need to re-assess their tolerance for risk and adjust their risk management and insurance programs. Transferring assets and acquiring new ones, such as homes or businesses in multiple countries, can create coverage gaps if families do not look holistically at their exposures.

Further, as family members expand and younger generations come of age, marry, and have families of their own, family offices can be called upon to serve three, four, even five generations in a single structure. Younger generations may not have the same risk tolerance as those of prior generations in a given family, which can result in differing approaches to protecting their assets.

3. Generational Shifts

Rising generations, which include millennials, are poised to take control of family leadership as well as family assets, which may amount to more than $68 trillion over the next 25 years.¹ Generational differences can be a strategic risk for family offices, particularly when younger generations hold different opinions on the family’s overarching direction and objectives. This divergence can lead to contentious discussions and disengagement, which puts additional pressure on the family office team.

4. Cyber risks

The growing number and sophistication of cyber-attacks are cause for concern, particularly among high-net-worth individuals and family offices. Digitization of operations adds convenience but increases vulnerability. A breach of personal data can become an enterprise risk. A cyber-attack using ransomware or other sophisticated means could shut operations down for weeks or months, with devastating financial consequences for a family.

How can family offices evolve to address these risks?

In this era of growing uncertainty, one of the biggest shifts among family offices is an increasing demand for information they can use to take action to protect families. That shift has ramped up family offices’ expectations for professional advisors and made timely risk information critical in decision making.

To learn more about how family office executives can help address these risks, read our whitepaper, “Family Office Risks: Managing the Impact of Change.”

¹ “U.S. High-Net-Worth and Ultra-High-Net-Worth Markets 2018: Shifting Demographics of Private Wealth,” Cerulli Associates, 2018.