Family offices are growing and may benefit from reviewing their risk management processes

September 9, 2020

An article by Sean Collins, research manager, Deloitte Services LP

While the increased volatility in financial markets may have given some investors additional anxiety, more than 75% of family offices reported that their portfolios met or exceeded expectations for the year through May.¹ As many of these family offices were successfully navigating their clients’ portfolios through the turbulence, almost half were also reviewing their risk management procedures.²

Difficulty gaining insights

A holistic review of risk management procedures includes, at a minimum, an assessment of investment oversight, financial statement audits, internal controls and processes. Because many family offices are exempt from the US Securities and Exchange Commission (SEC) filing requirements, it can be difficult to gain insights into the level that these elements are being incorporated within the industry.

Some family offices, such as those serving multiple families, are registered investment advisers (RIAs), and therefore required to file Form ADV with the SEC. However, since there’s no requirement for an RIA that is a family office to identify itself as such, we created a population of RIAs—that cater almost exclusively to high-net worth individuals (HNWIs) and provide portfolio management and other financial services. Let’s take a look at what insights may be found about family office asset growth and the adoption of risk management governance by these firms.

Family office AUM growth continues

Our population of—RIAs continues to experience growth in assets under management (AUM) (figure 1). Since 2016, these RIAs have grown their AUM at a compound annual rate of 8.6%.³ Size does make a difference as the smallest firms (less than $150 million in AUM) struggled to grow their assets as AUM fell by -12% annually.⁴ Conversely, firms with assets under management greater than $400 million were able to increase their assets by 10%.⁵ As a family office grows in size and complexity, a review and possible update to the governance framework may become necessary.

Figure 1.

Surprise asset examinations

Wealth preservation can involve not only protecting client assets from changing market conditions, but also safeguarding the family’s privacy and reputation. Apart from the increase in AUM, we noticed an increase in the number of firms reporting a surprise examination of client assets by an independent public accountant during the previous 12 months.⁶ While the SEC requires these examinations for some RIAs, the motivations to include these or other oversight mechanisms also exist for single family offices. A family office with a strong risk management framework is generally better prepared to withstand internal fraud, cyber risk threats and market disruptions.

A surprise examination of clients or completion of annual audits may provide an opportunity for an evaluation of the internal controls and other procedures related to the design and operation of the process. Regardless of SEC regulatory compliance requirements, regularly assessing the approach to risk management is important for all family offices and a periodic reconsideration of the risk governance structure may be appropriate. While the use of surprise audits may continue to increase for RIAs, there are several other options family offices should consider in order to demonstrate their commitment to transparency and oversight of client assets. Financial statement audits and internal control reviews often provide peace of mind and demonstrate a family office’s commitment to their clients’ long-term financial well-being.

Considerations moving forward

By holistically embracing risk management procedures, family offices may develop stronger relationships with their clients and create additional opportunities for future growth. The risk management governance structure may also require updates as the firm’s assets and client base grows. Incorporating a strong risk management framework may fortify the family office and help deliver a high impact client experience.