In today’s specialist family office sector, managing risk rather than avoiding it is taking an increasingly prominent role, particularly where diverse portfolios are likely to include at least some unusual assets and investments.
There are a number of reasons for this development apart from the heightened regulatory focus on risk. Among them are the increased regulation and scrutiny of counterparties that has come about following the credit crisis, but also the relative sophistication and financial literacy of the second and third generations who have come to the fore of wealthy families.
Before the credit crisis the awareness of risk around standard investments, such as investment portfolios, was generally well understood. This now has to be more widely and deeply correlated across the total wealth of the family, to include the non-standard assets such as hedge funds, private equity, property and business.
By reviewing, understanding and testing all the complex assets and counterparties involved in a family office and by thinking, rather than processing, the private client practitioner can take a more prominent role, becoming a trusted advisor, a “party at the table” and adding value in the form of clarity, efficiency and cost-effectiveness.
The appointment of an investment manager, for example, is just the start of the process. That manager’s performance must be monitored and independently reviewed regularly on a risk-adjusted basis. Furthermore, it will be important to be confident that the manager is contracting appropriate counterparties that pass the relevant due diligence checks.
Underperformance by an investment manager or failure to meet the benchmarks of a counterparty, such as the auditor or custodian of a hedge fund, cannot be ignored.