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Family Offices Add Reputation Management to Risk Management Agenda

Posted by Michelle Johnson on Nov 25, 2019 7:30:00 AM

Researchers estimate there are more than 5,300 family offices serving the needs of wealthy families around the world, with 75 percent located in North America or Europe.

Family offices have traditionally operated discretely, drawing little or no attention to themselves. But as the family office model evolves in its purpose and functions, many wealthy families realize that it is in their best interest for their family office to support and protect their personal brand and reputation.

Why Reputation Management Matters

With such rapid growth, it is surprising that family offices have remained in the shadows. But as they exert greater investment clout, venture into higher risk or speculative investments, seek to attract talented employees, and demonstrate interest in social and environmental investing, their otherwise private activities often become subject to public scrutiny and criticism. Anticipating public reaction and developing plans to address criticism and potential backlash can help family offices weather reputational risks.   

Direct Investing Risks

Family offices are increasingly making direct investments in private ventures that private equity or global banks previously would have handled. Direct investing by family offices has doubled in recent years as it enables families to have greater control of their money and to make their own investment decisions while reducing related costs.

However, greater freedom in private investments brings an increased risk for the family brand. The family office may decide to invest in a speculative company, a controversial new drug or an unproven technology. Although the family office is well-equipped to handle the financial risks, the nature of the investment could potentially damage the family’s reputation and standing if word leaks out.

Multi-Family Offices

Multi-family offices also are growing in number. Single-family offices that wish to convert to a multi-family office model seek to attract assets from other wealthy families, so the family office’s reputation and investment track record are critical factors in gathering outside funds. As families join together to grow their asset bases, their risks increase for the public spotlight and criticism as well as for regulatory scrutiny in jurisdictions around the world.  

Impact Investing

A massive transfer of family wealth to millennials and Generation Z family members will occur over the next 15 years. Many younger family members are committed to using their private wealth for the public good through impact investing, and this powerful trend is spreading across all age groups. A recent survey found that nearly 40 percent of family offices expect to increase their allocations to environmental and social investments. While impact investing may be socially beneficial, these causes may provoke controversy with customers of family business ventures and business partners.   

Related Blog: Are Family Office Expenses Deductible as Trade or Business Expenses?

The Battle for Talent

The rapid growth of family offices has fostered the need for investment expertise and other skilled resources. The largest family offices often retain hundreds of employees who are engaged in a wide range of activities. Family offices now regularly compete for talent against investment banks, hedge funds, private equity firms, and large asset managers—those with strong reputations will fare better in the battle for skilled employees.

These trends give family offices reason to pause and consider the potential risks to their brand, reputation, and standing. In light of these activities, savvy family offices are beginning to include a review of their reputational risks as part of their risk management planning process.

Questions about managing for your family office? We would be happy to discuss your strategy with you. Contact Michelle Johnson, CPA at 214-635-2601.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.    

Topics: Family Office