11/07/23

FAMILY OFFICES: Family Offices Urged to Prioritize Stress Testing for Risk Management, According to Dentons Study

As published on: hubbis.com, Tuesday 11 July, 2023.

A recent study conducted by Dentons, the global law firm, reveals that the majority of family office executives have not adequately "stress tested" their risk management plans to mitigate threats such as data theft, health issues, fraud, kidnapping, and business disruptions.

The study surveyed 200 family office executives, primarily in the United States, with some participants from other countries. Dentons emphasizes the need for family offices to address these risks, especially in light of rising interest rates, geopolitical uncertainties, and the ongoing wealth transfer. The COVID-19 pandemic has also served as a wake-up call for family offices to enhance their risk management strategies.

Despite overseeing trillions of dollars in assets, family offices often lack the necessary resources and expertise to effectively manage emerging threats. Dentons emphasizes the importance of addressing this gap, especially considering the increasing cybersecurity risks and other potential dangers. The report underscores the need for family offices to enhance their risk management practices as they face higher visibility due to investment and regulatory considerations. Additionally, with increased political scrutiny surrounding wealth, family offices must elevate their risk management efforts.

Kevin Hulbert, a senior advisor at Dentons, highlights the vulnerability of family offices, stating that they often fall through the cracks, being too small to be specifically targeted yet lacking robust risk management measures typically seen in larger organizations. Dentons' 15-page report identifies various risks and their potential consequences, including property damage, data breaches, health issues or death, business disruptions, identity theft, regulatory penalties, financial loss, and reputational damage.

The study examines both internal and external resources that family offices can leverage to enhance their risk management capabilities. It suggests that a change in mindset is needed within family offices, as many underestimate threat levels or demonstrate complacency towards risks. Limited staffing, cost considerations, and convenience are cited as additional barriers to effective risk management. Dentons highlights the lessons from the pandemic, revealing that a significant number of family offices did not have a business continuity plan in place before COVID-19, and implementing secure remote working protocols remains a top risk management challenge for many.

Edward Marshall, Global Head of Family Offices and HNW Group at Dentons, emphasizes the importance of stress testing in assessing the strength and resilience of risk management practices. Marshall suggests various stress testing methods, from computer-simulated analysis to facilitated discussions on response strategies. He highlights the benefits of stress testing, which include the development of updated contingency plans, identification of vulnerabilities, and improved protection against reputational, regulatory, legal, and geopolitical risks.

The study, conducted from May 25 to August 10, 2020, gathered data from a range of family offices, primarily single-family offices, with most reporting net worth between $100 million and $5 billion. Geographically, family offices were concentrated in the Northeast and Southern states of the US, with some international responses from countries including Australia, Brazil, Canada, Europe, Germany, Hong Kong, Italy, Mexico, Peru, Portugal, Singapore, South Africa, and the UK.

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Family Offices Risk Management Dentons