Protect Thyself

As the saying goes: “The more you have, the more you can lose.”

The ultrahigh-net-worth population in the United States continues to grow at a 6 percent rate, with over 69,000 falling into the category, according to Wealth-X. The continued expansion of wealth enables more investment opportunities, greater discretionary income and growing inventories of residences, art collections and business investments.

However, with every asset there is a liability. While insurance is an important safeguard for protecting one’s net worth, it is not the only thing to consider. Developing a comprehensive risk management plan is important, and the family office can offer critical support in creating an expansive program to offset the liabilities and risks confronting families of wealth.

A rarely discussed but unavoidable fact in the arena of wealth management is that many family offices are vulnerable to fraud, especially by trusted insiders. Boston industrialist Frederick Ayer Sr. and his descendants, for example, built a $600 million fortune over more than a century, which was then subjected to a
$58 million siphoning by a trusted family confidant.

Unfortunately, the case studies are many. It is believed that a small office with fewer employees makes it easier to monitor and control fraud. However, the fewer employees, the more difficult internal controls become. Internal controls are a series of systems and procedures designed to serve as the first line of defense in safeguarding a company’s assets. A family office is no different.

While not a guarantee, internal controls, if properly structured, can go a long way toward helping protect a family office against theft and fraud. It’s important to recognize that breakdowns in controls can occur, including human error, deliberate circumvention, management overrides and even collusion.

As technology advances, cyber
risks and threats against wealthy individuals become
more commonplace.
Similarly, the tools cybercriminals use continue to evolve with more sophistication. Therefore, it is not uncommon for a wealthy family to hire a specialized firm to provide security advisory services in order to evaluate current practices, identify potential risk areas and develop strategies to address cyber and personal security issues.

Certain types of coverage should be part of every family’s risk management program. For example, an appropriate level of excess liability insurance is critical in protecting the family from an unforeseen future claim against the wealth enterprise. Completing background checks (many times offered in homeowners policies) can provide greater transparency on risks associated with household staff. It is estimated that at least one in five Florida motorists are uninsured (UM) or underinsured (IUM) and it is equally common for wealthy individuals to not have adequate levels of UM/IUM coverage. Adequate coverage levels for business and personal risks should also be considered when serving as directors and officers of nonprofit organizations.

Finally, the family office investment risk management plan is a critical path for wealth sustainability in measuring, managing and governing investment risks. This is a topic meriting future column discussion. The path to sustaining wealth can be a perilous one and should not be left to chance, but rather based on thoughtful analysis, planning and advice. ?

Julie Neitzel is a partner and advisor with WE Family Offices in Miami and a board member of the Miami Finance Forum. Contact her at or 305.825.2225.

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