Take Steps to Combat Risk with a Thoughtful Strategy

Date: Jul 12 2018

Yung-Yu Ma, Ph.D., Chief Investment Strategist, BMO Wealth Management, CTC | myCFO

In the midst of a growth economy, risk factors are sometimes pushed to the periphery of a company’s focus. It’s no different for family offices. When those risks eventually come crashing into the forefront, they’re often unexpected and can be costly. Incorporating risk planning into your short-term and long-term strategy can be extremely valuable.

Recently at the FOX Family Office Forum, I discussed risk in my presentation, “A World of Increasing Risk – Are We Whistling in the Dark?” While many organizations are taking action, the realities of the risks may be greater than is commonly understood. If we’re able to identify the risks—economic, political, environmental, and cyber—the next step should be rethinking strategy to incorporate these risks.

Here are some ways family offices can start to rethink and reshape their approaches to risk:

Economic Risks

Even though we’ve been in a positive-moving bull market for a long time, now is not the time to lose sight of potential risks. The most prominent economic risks currently are related to the prospect of rising inflation and the response by the Fed to raise interest rates.  If interest rates rise more than expected, the value of assets being held that have a long-term stream of cash flow associated with them—equities, fixed income, real estate, etc.—are in jeopardy.

Because of the uncertainty around interest rates, each new piece of information is often met with an outsized reaction by the market place. As investors, we shouldn’t place too much emphasis on one month’s reading for wage growth, for example, but instead consider larger trends and structural breaks. It’s a good time to reevaluate your portfolio with a longer-term outlook so you won’t be subjected to big swings due to increased volatility.

Environmental Risks

There are a lot of ways to think about environmental risks. One way is for family offices to think about their own exposures. They need to consider their location, the location of any business holdings they may have, and, for business owning families, the way their supply chains are tied to certain geographies. Strategies need to address the impact of flooding, for example, or how the office might be affected by an earthquake.

We can certainly keep our fingers crossed and hope this type of risk doesn’t happen, but the potential is always looming and the disruption could be catastrophic. There should be off-site contingency plans in place if people simply cannot get to a certain location and back-up systems in place for sensitive information. There are consulting firms that have environmental risk consulting services, and it is recommended that a family office reassess that type of risk periodically.

Geopolitical Risks

The most prominent geopolitical risk facing all of us right now is what is happening with trade policy. The risk isn’t just coming from China, it also affects trade with Europe, Canada, Japan, and all other major U.S. trading partners. The administration is taking a harder line than what was expected on restructuring trade and we’re seeing this cause a broad disruption of the economy.

It is not clear to the market if the administration is digging in for a multi-year battle on this, or if it is making a big push prior to mid-term elections, and will then move on to something else. Either way, the uncertainty is negative for the market and in such a volatile geopolitical environment, the best thing to do is plan for continued uncertainty and international discord.

Cyber Risks

Different family offices have various levels of preparation for cyber risk. It’s important to remember that the biggest element for cybersecurity remains the human element. More often than not, networks are compromised because someone accidentally clicked on a link that was disguised as something else and allowed intruders to get into the system.

The best remedy for this type of risk is cybersecurity education and very clear reporting protocols. We can do some safeguarding with technology, but if the weakest link is someone not paying enough attention, that can be a big risk factor.

There’s definitely a lot of spending that’s taking place on cybersecurity right now, so it’s clear that family offices are paying more attention to it. But, a lot of the education around the vulnerabilities needs to extend beyond the IT department.

If a breach causes a family office to lose the extremely sensitive information that is often held, trust is lost, and things can go south quickly. Cybersecurity is a major risk that needs to be addressed as thoroughly as possible across every organization.

Taking time to thoughtfully evaluate the risk affecting your family office across these four dimensions of risk—economic, political, environmental, and cyber—can safeguard your family office for the long-term and greatly contribute to its longevity. You’ll need to do more than just consider what the risks are, you’ll have to take some strategic steps to prepare.


Yung-Yu Ma was a presenter at the FOX Family Office Forum, July 17-18, 2018 in Chicago. Click here for more information.