Essential Risk Management for Family Offices

Once you attain a certain level of wealth, managing your personal finances can become a time-consuming undertaking that requires expertise. For this reason, many successful individuals turn to a family office. Although a family office can provide critical wealth management services, risk controls are essential.

Who Needs a Family Office?

Investopedia describes a family office as a private wealth management advisory firm that serves ultra-high-net-worth individuals. Although many traditional wealth management firms provide solutions for financial planning and investment, family offices go above and beyond this level of service. In addition to investment and financial planning, they may offer a wide range of other services, such as budgeting, charitable giving, wealth transfer planning, and insurance. Some family offices also conduct background checks on staff, provide personal security, and educate younger family members on wealth management.

A family office can be a smart idea for some individuals, but not everyone needs this level of service. To determine whether a family office makes sense for you, ask yourself the following:

• Do you have $30 million or more in investable assets? Family offices are designed to serve ultra-high-net-worth individuals. According to Investopedia, $30 million is the threshold. If you have less than this, you still need wealth management, insurance, and estate planning services, but you can obtain these services individually outside of a family office.
• Do you have complex financial needs? For example, you may need hands-on assistance with succession planning for a large amount of wealth, expert tax assistance for complicated filings, and robust insurance coverage for your risks and assets. By coordinating services people often receive separately – such as insurance and estate planning – family offices are able to simplify complex financial situations.

Managing the Risks Associated with a Family Office

According to Deloitte, J.D. Rockefeller established the first full-service single family office in the U.S. in 1882. Family offices have been around for a long time because they make sense for individuals who, like Rockefeller, have vast sums of wealth that require expert management. A good family office can help wealthy individuals avoid many of the headaches that can come with this level of wealth.

However, there is also a potential for things to go wrong. For example, the lawyers, accountants, and others responsible for managing your money could make a mistake that results in a financial loss. You also need to consider the risks of fraud and embezzlement.

Good risk management practices can help you avoid these challenges.

1. Select the right type and size of family office for your needs.

According to Forbes, a small family office with around six employees might cost $1 to $2 million a year to operate, whereas a large family office with 25 employees could cost $8 to $10 million a year.

Multi-family offices tend to be less expensive than those that serve a single family. They may be a good option for individuals who don’t need – or wish to pay for – a dedicated staff.

Investopedia says outsourced family offices are another option. In an outsourced family office, the professionals providing services do not work for the same organization. However, they have authorization to consult with each other.

2. Vet the professionals.

If you’re creating a family office, you’ll need to select what financial advisors, lawyers, and other professionals will run it. Since you will be trusting these people with your wealth, you need to be sure they have the expertise required to manage your funds competently. You also need to agree with their approach and ensure they offer all of the services you require. Run background checks, check references, and conduct interviews until you are satisfied.

3. Implement anti-fraud measures.

Large amounts of wealth tend to attract scammers. Deloitte says family offices should train employees on how to spot fraudulent behaviors, conduct periodic fraud risk assessments, segregate duties, and create other policies and procedures to prevent fraud.

4. Prioritize cybersecurity.

A ransomware or social engineering scheme could result in major losses. Robust cybersecurity measures are an absolute must and need to focus on both people and technology. Individuals need training on how to avoid phishing attacks and business email compromise schemes, whereas technology systems need to be secure enough to resist hackers and malware.

5. Maintain oversight.

A family office alleviates much of the work involved in managing a large amount of wealth. However, you’ll still want to be involved at some level. Make sure you have access to all your documents and review them for irregularities.

Another important aspect of risk management for family offices is robust insurance coverage. Heffernan Insurance Brokers provides insurance for family offices and affluent individuals. Learn more.