After experiencing what feels like a generation’s worth of volatility in the past three years, family offices say their top priority over the next 12 to 24 months is managing risk, according to the 2022 Family Office Benchmarking Report authored by Raphael (“Raffi”) Amit, the Marie and Joseph Melone Professor at the Wharton School of the University of Pennsylvania and the cofounder and Chairman of the Wharton GFA. Yet further data points reveal how family offices are assuming a defensive crouch that is heavily focused on mitigating financial risks while ignoring operational and strategic risks.
For example, many family offices are moving more and more into cash in the face of financial risks: 32% have increased allocation to cash and cash equivalent, 12% reduced allocation to illiquid assets such as venture capital (VC) or private equity (PE) and real estate, and 14% increased allocation to highly liquid short-term fixed income assets. But this is a passive approach to liquidity management, constrained by what family offices often lack: real-time visibility into spending, tax liabilities and more, which would guide more strategic investment.
Understandably, family offices have felt pressure from geopolitical uncertainty, economic challenges such as rising inflation and interest rates, and persistent fallout from the pandemic. Against this backdrop, 59% of respondents have re-examined the family’s volatility and risk tolerance. Overall, 39% say that tolerance decreased, compared with 7% who say it increased (while the rest reported no change). To deliver holistic risk management, respondents say their main hurdles are financial and investment risks, information security and cyber risks, and financial fraud and identity theft.
“As the landscape of risk continues to take on new dimensions, it’s imperative for offices to take a more active and operational view — through the lens of people, process and technology improvements,” said Bobby Stover, EY Americas Family Enterprise and Family Office Leader. “Active risk management doesn’t just react to an oncoming storm — it mitigates the fallout from disturbances that aren’t even in the forecast yet, while equipping you with the tools and the insights to capitalize on evolving opportunities.”
Here’s how to position your family office to succeed.