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July 2022

Assessment and Mitigation of Risk in Private Wealth Management


Risk Management
A "possible hindrance to the intended result" is how risk can be defined. Risk management is not just a process of identification and assessment; it also involves analysis, strategy, and mitigation. The primary risk management methods are predominantly avoidance, retention, sharing, transferring, and loss prevention and reduction. These may apply to all facets of an individual's, family's, and corporate life and can pay off in the long run.

In the world of finances, its application is for an organization's capital, earnings, and capital investments. It has an overlay with legal and security aspects too. A Risk Assessment Manager seeks to reduce the risk of financial loss linked with using various investment products. Along with identification and management, one often hears about Risk Tolerance. There is a strong link between the two as Risk Tolerance is the pre-cursor to Risk Management, resulting in an idea known as Risk Profiling.

Specialists have determined the following to be the most severe risks and dangers that shadow Wealth Management:

  1. The potential for monetary losses: They are not merely talking about the repercussions of poor investments when they say this. It is very unusual for customers whose net worth falls within the categories of HNW or UHNW to have collections that may be disregarded. It may get ignored given the insignificant allot in one shot, though its compounding could be much more extensive than anticipation. They consist of things like expensive apparel or accessories, for instance.

  2. The investor's potential for investment was significantly underestimated : In the absence of a comprehensive assessment, investors may grossly underestimate or overestimate their ability to make profitable investments. As a result, investment counsellors have little choice but to depend on objective data rather than the hunches of their clients.

  3. Bringing about a swift shift in the wealth management plan that was previously agreed upon: Investors may not always follow the procedures they have made for their investments. Thereby, they fail to adapt to the change of trajectory with the changing environment resulting in more significant losses than those first expected.

It is also possible for the adviser and the investor to have misconceptions throughout working together. Wealth management experts may meet a scenario where consumers insist on putting cash in high-risk instruments and then attempt to pass the obligation to their advisors. As a result, loss seeps into the relationship.

Assessing Risk attached to Wealth Portfolio

Risk Assessment may translate to risk aversion for some and risk-seeking for some. Mal-Product-curation, cybercrime, fraud, and organizational and operational hazards are the risks that give wealth advisors and the families they serve the most significant cause of worry. The wealth and assets of an ultra-high-net-worth family may be enticing to the wrong people, especially in a Family Office setting where a single individual has broad responsibility for financial operations and maintains extensive contact with family members. It is critical to recognize the risk, educate family members and Family Office personnel about fraudulent behaviors, implement applicable rules and processes, conduct frequent fraud risk assessments, and segregate tasks to prevent, identify, and deter fraud. Compliances and regular auditing can also play a crucial role in the context.

Wealth advisors have an essential role to play in risk assessment and management. Still, the method they choose to achieve this aim is contingent on several different factors, the amount of competence of their personnel, and the complexity of their business operations. It is indispensable to have both an efficient system of internal controls and a solid risk management framework to cope with the wide variety of organizational and operational hazards. Internal controls may increase the quality of financial information utilized to keep wealth, make essential decisions, and strengthen the family's faith in the business's general operations. This helps the family retain their wealth and make crucial decisions. Wealth advisors and the ultra-wealthy families they represent are potentially exposed to several types of cyber risk in various contexts. The risks can never be entirely tarnished; building a strong firewall and tech-enabled systems can help make a fort nearly impossible to breach. It is crucial to be prepared instead of being an ostrich.

Formulating Risk Awareness

There are many practical challenges in offering people and families wholesome risk management guidance. One of these is the degree to which risks that have been recognized and evaluated can be mitigated and handled through self-management. Variables beyond self-management are also at play and should be kept in mind. Financial advisors should assess and revise the approach towards these hazards as families' budgetary constraints, and risks change over time. Advisor-recommended risk management measures should consider the family's general well-being, financial situation, and long-term objectives.

The families, their family offices, and wealth advisors should be aware of the following pointers:

  1. The family's risk concerns throughout the early years should be identified and analysed;

  2. Suggest and support strategies to control a family's critical risks during the early stages of their careers;

  3. The family's risk exposures during the professional development period should be identified and analysed;

  4. Recommend and support risk management strategies for families during the career design phase;

  5. The family's risk exposures at the apex build-up stage should be identified and analysed;

  6. Suggest and support strategies to control a family's risk exposures at the time of peak accumulation;

  7. The family's risk exposures over the retirement stage should be identified and analysed;

  8. The plan to control threats to a person's retirement lifestyle goals should be suggested and justified.

What are some viable methods of mitigating risk?

  1. Leadership

    The directors, officers, and board of directors of the family office determine the services that will be provided to the family and the connections between the personnel responsible for providing those services. They also layout how the family will be able to access those services. The family members are often part of the management team, and they need to know the difference their presence makes. Meanwhile, the directors and officers of the business supervise the wealth management services offered by the office staff and the selection of outside advisers such as legal companies, accounting firms, and financial consultants.

    As the family grows in number and the complexity of its needs, the professional staff and the board of directors have developed a track record of making strategic decisions and defining priorities. This has allowed them to meet the growing demands of the family. Diversification of experience and expertise-led approach brought in by Multi-Family office setups may come in handy with several families' ever-increasing needs.

  2. Services Offered

    The wealth advisor facilitates communication between the service provider and beneficiary. In family offices with solid risk management systems, client service agreements that specify the services offered and the associated prices are commonplace. Using this tactic, each participant is held to a greater level of accountability, and the procedure is conducted more transparently. In addition, this allows personalization of the services and payments made for each family member based on the amount of hardship they are experiencing.

    When centralizing services for the family, it is crucial to remember that family office services may also be provided by a business team working inside a family operating company or holding company. Or availing the services from a corporately designed and thoroughly compliant Multi-Family office may provide better outcomes as the family can get attention from an expert panel which may not be viable for every family office to avail. Optimization of execution cost and continuity is another benefit offered by Multi-Family office setups as their investment in platform and technology gets distributed, and it's to the advantage of both investor and service provider.

    By de-centralizing responsibility, directors, officials, and trustees should work together to design a policy that will guarantee that appropriate care standards, such as service agreements, are adhered to in providing these services. Which then can become a mandate of a wealth advisor enabled by a robust platform ensuring the longevity of service and value.

  3. Administration

    A family office's most valuable asset is its staff. Access to sensitive information, understanding of the family tree and culture, and access to a wide variety of data about the family they serve are all privileges that professional personnel enjoy. They're generally on call 24 hours a day, seven days a week, to ensure their clients can count on them. Foremost among family office employees is the ability to identify and mitigate possible risks to themselves, their families, or the family office. As cliché as it may sound, positive morale and appropriate incentivization of the staff can help in an effective and efficient advisory to mitigate risk management. A growth-laden path is to every human's liking, and the ultra-short hierarchy can sometimes hit it early, leading to either complacency or suffocation.

Conclusion

It's vital to consider the family business's risk. Integrating risk management policies to safeguard family wealth is no longer just an idea; but necessary. The ability to conduct in-depth risk analyses, recommend risk mitigation strategies, select insurance products, and perform asset allocation are just a few of the many skills and competencies needed to provide financial advice. All of this must be done while keeping a firm grasp on the relevant legal landscape, the accessibility of financial instruments, and their associated costs. Understanding whether to recommend an investor to a subject matter expert or bring in a generalist is essential for success. Someone for whom this is core bread and butter will likely be more concerned and particular about effectiveness and life of decision.


Garima Gulati Bhutani
Director - Human Resources and Communications
Client Associates, Gurgaon
Reach at: garimagulati@clientassociates.com