Tradition and transformation in single family offices

(Second of two parts)

In the first part of this article, we discussed how single family offices (SFOs) have concerns about managing reporting responsibilities and compliance in response to the evolving regulations and seizing the opportunities arising from harnessing new technologies to enable data-driven decision-making. This is based on the survey recently conducted by EY teams to gather and share deeper insights into their priorities in times of accelerating economic, social, and geopolitical disruption.

It was striking how, regardless of where these surveyed SFOs are and the different functions they undertake, there were several common focus areas identified — wealth and regulation, digital transformation, risk and regulation, and strategy and governance.

In this second part, we will discuss risk and reputation, and strategy and governance.

RISK AND REPUTATIONRisk management has long been a strategic focus for most SFOs, but many are seeing the need to revisit scope, methods and leading practices. In particular, SFOs raised the need for more sophisticated and rigorous models for managing an expanding scope of risk and reputation considerations. A failure to address this need can leave families and family office leaders exposed to unexpected situations.

While many SFOs recognize risk management as a key function that must be fulfilled, the survey suggests that some SFOs feel their own risk management frameworks could be strengthened. Only 49% of surveyed SFOs shared confidence that they have a structured process in place to identify risks, while 31% say that risk management decisions are not taken at the highest levels of their organization. This lack of formal, institutional-grade risk management can leave SFOs in a reactive posture, resulting in them spending valuable time putting out fires or dealing with gaps in expectations. Moreover, it can result in reputational risks given the prominence of families.

Robust risk management can deliver broader benefits to the organization, reinforcing trust and confidence not just within the organization, but with the stakeholders as well. Families must review their governance frameworks to determine gaps and potential opportunities, but they must also have a commonly agreed ownership strategy. Families will need to determine high-level risks and use them to frame a properly designed risk program based on their own risk appetite. However, not all families will rank top areas of focus — such as family reputation, investments, cyber and data security and integrity — equally or even view them in the same way.

After refreshing the SFO’s risk management strategy and program, benefits will only materialize once an enhanced risk management model is implemented and operating as intended. In order to ensure that these benefits are sustained, SFOs will need to establish an evergreen program for the continuous testing and refinement of their risk management processes. Adopting a comprehensive approach tailored to their own unique risk appetite, strengths and resources will provide SFOs with more certainty and resilience.

Rapid changes in doing business today are disruptions that cause the imbalance of priorities, often becoming a forgone conclusion of misplaced resources as plans are no longer responsive to the current challenges.

Family offices should look at these changes as opportunities to thrive in rather than difficulties to falter from. Establishing a well-organized risk management plan structure would make sense to protect the family name and reputation for years to come. The study shows that as many as 90% of SFOs are considering or are already co-sourcing functions related to risk management, collaborating with external partners to support their risk agenda.

STRATEGY AND GOVERNANCEIn an environment where emerging technologies and changing regulations create disruption, a validated strategic plan and governance systems that are periodically refreshed are more valuable than ever for SFOs. While most SFOs indicated some form of strategic planning and governance construct in place, too many share that these systems are relatively informal. This can often leave gaps in expectations, escalation or execution.

The study showed that SFOs and prominent families themselves are being intentional in designing and operating more sophisticated and strategic governance constructs. Dual Governance, which distinguishes and aligns the business and family governance and contemplates the strategic and often essential role of the family office, is facilitating clarity, execution, and stakeholder alignment.

One of the dynamics driving new risk and reputation frameworks is expanding the definition of value and risk to include new environmental, social and governance (ESG) considerations. This was identified as an area for increased focus and action, especially as it relates to evolving multigenerational family priorities and legacy amidst more prominent ESG trends.

Human capital, societal and community value as well as customer and stakeholder impact are now part of a growing appetite to define value and purpose beyond traditional performance metrics. At the same time, many families are innovating to formally incorporate growing consumer expectations into their strategic planning and governance constructs.

Leading SFOs are taking action in different ways, with 44% of survey respondents planning to exclude investments that do not align with the ethics and values of the family, whether these are ESG-related or reflect other values the family holds. However, the survey also exposes a potential gap in execution — while as much as 85% of SFOs indicate the importance of measuring and optimizing non-financial performance, only 30% do so to a significant extent. Across all regions of the world, the most widely deployed metric in measuring performance for the SFO is cost instead of value.

It should be noted that there is a proven and tangible benefit to innovating performance to include new measures, with 58% of SFOs sharing that including non-financial metrics to a significant extent led to performance that exceeded expectations. As the aspirations and goals of the family expand, it will be critical for SFOs to take the lead in designing and deploying next generation performance criteria that encompasses the broader mandate as it relates to ESG.

PROTECTING THE FAMILY LEGACY ACROSS GENERATIONSThe four key themes discussed show the new pressures that SFOs must navigate related to their wealth. They will have to consider accelerating tax, regulatory and economic policies and disruptions as jurisdictions around the world attempt to address a wide range of societal and geopolitical challenges. This provides exciting opportunities to make use of emerging technologies and data to deliver insights like never before.

As they traverse the pace of change in technology, regulation, risk and governance, SFOs will need agility as they balance their obligations with the need to maintain strategic focus in support of their family stakeholders. In keeping up with the times, SFOs need to align their objectives to enable them to create long-term value and not just short-term returns while managing the risks that will threaten the continuity of the family legacy.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co.

Kristopher S. Catalan is the Philippines EY private leader and Jules E. Riego is the Philippines and ASEAN Business Tax Services (BTS) leader of SGV & Co.