Many family offices are ill-prepared for the array of external risks they face, according to a risk management survey by Dentons, “The Evolving Risk Landscape for Family Offices.”
The Dentons survey found that half of single family offices have no risk management processes in place to address risks such as climate change/natural disasters (50%), geopolitical risks like wars and terrorism (49%) and emerging technology risks, including artificial intelligence (53%). Older family offices are more likely than newer ones to lack these processes: 64% of those established more than 10 years ago do not have them versus 38% of family offices established within the past 10 years.
Many of these family offices do, however, recognize that these risks — particularly those regarding emerging technology — need to be addressed. Nearly half (48%) of family offices plan to upgrade technology to strengthen their risk capabilities in the next year, and 19% say this is their top priority, according to the Dentons survey. In addition, IT and cybersecurity are at the top of the list of areas where family offices are understaffed, with 39% saying they are understaffed in this area.
“Innovation is a wonderful thing, but it creates all these vulnerabilities, and the problem with all of us is we have survivorship bias,” says Edward V. Marshall, global head of family office for Dentons. “If something bad hasn’t happened to us, we assume that life is beautiful. That can lead us into underestimating a lot of potential risks: legal, regulatory, technological, reputational, privacy, physical, geopolitical.”
Marshall says family offices don’t need to panic, though they do need to take reasonable precautions.
“I don’t like to think of this from a fear, doom-and-gloom perspective. I think that’s just the wrong way to approach this whole topic,” Marshall says. “It’s how you manage these risks: Look at it as a critical function of building risk management into the organizational DNA of a family office versus being reactionary or hyperbolic in terms of how you’re portraying that risk.”
For example, when it comes to artificial intelligence, Marshall points out that family offices face more or less the same risks from the technology as every other business.
“I don’t think there’s anything inherent in AI that makes it more or less dangerous for family offices versus non-family offices,” Marshall says. “It’s just understanding: What are you sharing? How are you using that technology? And what does it have access to?”
One problem posed by AI is that of deepfakes — increasingly realistic voice recordings or videos that can fool family members or family office employees. Marshall says this is an evolution rather than a completely new development.
“We had that before AI became a popular term and people started talking about large language models. People have been trying to counter deepfakes for a while,” Marshall says. “It’s an evolution of how people are leveraging the human element to social engineer their way into your bank account.”
It’s important when evaluating any technology service to understand the pros and cons, especially with free services.
“Regardless of whatever technology you’re thinking about, read the terms of service,” Marshall says. “Read what data you’re sharing. Imagine what kind of information we share just to get a free email address. What are we willing to give up in order to receive what has been labeled to us as free services? Remember, if it’s free, you’re the product.”
Any mitigation strategy for technology risks should be part of a broader risk management strategy, Marshall says.
“You should be thinking about identifying your digital and non-digital crown jewels,” Marshall says. “What’s important to you to protect? What is the mission of the family to protect? Then go from there.”