Sara Hamilton is the founder and CEO of Family Office Exchange. Hamilton and Family Office Exchange serve as advisors to investors with assets lasting beyond one generation.

Risk management is hardly a new concept in the corporate world, but even in sophisticated family enterprises, it is far from an established practice. Family Office Exchange (FOX) recently assembled the findings of a yearlong research study on how financial families identify and assess risk. The results demonstrate that even those families that list risk management as a key concern usually limit their definition of risk to financial security or investment volatility. Adopting a comprehensive view of risk requires looking beyond traditional investment diversification and insurance coverage to examine a wider spectrum of risks, such as selection of inappropriate trustees, a lack of clear decision-making processes within the family and negative media exposure.

FOX asked 40 ultrahigh-net-worth families to identify the areas in which they have the most concern. Ten categories emerged as areas where threats to stability could lead to the most damage in terms of long-term generational wealth and family continuity. (Click image to enlarge)

Five of the 10 categories fall under Family Continuity and Governance. A closer look at each area reveals the range of risk issues covered within each category, as well as the approaches used by families to solve or lessen the impact of these threats.

1. Family Legacy
When wealth inheritance comprises one of a family’s goals, a strong family legacy can provide the emotional glue that keeps the generations motivated to work together. Many families believe in instilling this legacy even in young children, so that they grow up understanding their history and who they are.

A family in the Midwest developed a mentorship program to ensure an appreciation for family history in younger generations. Children are paired up with a relative who teaches them the family history on an ongoing basis. Adults are assigned this responsibility when a new family member is born. This is a commitment that everyone participates in. It also serves to tie the family together across generations and family branches.

2. Family Governance and Decision-Making
An effective governance system facilitates trust within the family. Clear processes and guidelines exist to detail how decisions are made, and those decisions are communicated in a timely fashion. Strong governance becomes even more critical as the family grows and wealth is shared among both siblings and cousins.

A family that recently sold its privately held business decided that they would need the same type of structure to manage their finances that they had implemented in the past to manage their firm. The governance system had to provide enough structure and discipline for managing substantial shared family assets while not stifling the flexibility and freedom of individuals or households. They developed a council made up of representatives from each branch of the family. Other members were encouraged to participate on committees that reported to the council. Educators were brought in to teach leadership, mediation and basic legal and financial skills to give all members a baseline education in wealth management.