What is ERM and Why Is It Important For Your Family Office?

What is enterprise risk management (ERM)? The term refers to the efforts undertaken by an organization in order to minimize the risks to its capital and earnings. It’s a company-wide approach—ERM refers to all the investments made by the organization, not those for the particular client. Why does it matter for your family office? Find it out in this article!

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What Is Enterprise Risk Management (ERM)

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Enterprise risk management is the process of defining a strategy to reduce the risks related to investments made by your family office. It incorporates assessing potential risks and devising strategies to reduce them. It is conducted from the perspective of the whole organization, not particular clients—this is crucial for multi-family offices.

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ERM is targeted at eliminating bias in silos that often occurs when risk management is conducted only on the client level. While not all industries adopt it, enterprise risk management is critical in finance.

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Why Is Enterprise Risk Management Important in Finance?

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If you know how to start a family office, you realize that evaluating risks, both those related to compliance and your investments, is one of the first steps you need to take. Yet, do you know why is it so important to conduct enterprise-level risk management? If not, here’s the explanation.

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Unifying the Strategy and Focusing on Risks in General

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Every team and area of your family office faces its own risks. For instance, the IT department will be focused on data security, while a wealth manager will be focused on mitigating risks relating to regulatory changes in wealth management. As a result, the goals of each team will go in completely different directions, becoming ineffective.

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Adopting enterprise risk management lets you….avoid this risk. With it, you plan the strategy for your family office as a whole, considering the concerns and information from all the key areas and teams. This way, you can prepare a better strategy, one that does not sacrifice one type of risk for the sake of another.

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This also lets your family office become more objective in risk management. With all the perspectives and risks taken into account, you can decide what needs to be prioritized—this could otherwise be influenced too strongly by the members of the particular teams.

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Enhanced Risk Awareness

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One of the reasons why enterprise risk management is so important is that it gives you a full overview of the risks your organization faces. You know what potential issues may affect each of the teams and get insights into dangers that you wouldn’t think about otherwise.

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More Efficient Resource Allocation

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Having a complete overview of the risk and preparing a unified strategy gives you a better grasp of your resources. You know exactly what power you have, what potential risks you need to mitigate, and which of them are the most important. This allows you to allocate resources more effectively.

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Trust and Confidence

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Preparing and presenting a yearly ERM strategy to the stakeholders is key to building trust. By doing so, you show that you are aware of the potential risks and have taken action to prevent or mitigate them.

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Better Handling of Potential Risks

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As business people, we all love to avoid risks or combat them when they occur. However, there are more strategies for dealing with them and adopting ERM enables you to select the best one.

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Instead of relying on instincts and switching to the most common strategy, during an ERM risk evaluation process, you can classify the potential dangers based on the methods of handling them in your family office, namely:

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• Risk acceptance—You accept the risk and prepare a strategy for handling it when it occurs.
• Risk avoidance—You want to avoid this risk from occurring, prepare a preventive strategy.
• Risk challenge—You want to challenge the risk—interrupt it and stop it from escalating when it occurs.

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Additionally, adopting ERM lets you prioritize risk handling when several occur simultaneously. Plus, it helps you define what risk should be handled by a third party since looking at a strategy on an enterprise level gives you insight into your capabilities. You will know which risks are too costly or require resources that you don’t have and allocate third-party resources immediately.

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Conclusion

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Enterprise risk management is crucial in finance, whether you start a family office or manage a large bank. It gives you a better insight into factors that could disrupt your operations and lets you prepare in advance while making such preparations objective. Therefore, we strongly recommend adopting this strategy in your organization—it is the best way to build trust with your clients and secure your interests.

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Did you like this article? Then you can also read: Personalizing Client Experiences in Wealth Management

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