In theory, diversification and risk management might seem straightforward. In practice, they are anything but.

Entrepreneurs (and their families) with business interests and assets spread across various jurisdictions navigate a complex web, managed by multiple advisors and decision-makers. Even minor changes can significantly impact the entire ecosystem, such as:

• Shifts in foreign trade agreements or policies that destabilise and devalue business assets or investments in a particular region
• Unexpected downturns in the real estate market, which could diminish revenue streams, lead to an over-leveraged position, and trigger margin calls on private assets, threatening the family’s overall wealth and activities
• The relocation of a family member to another country, inadvertently exposing the family’s entire wealth to foreign disclosure laws
• Sudden travel restrictions (like during the COVID-19 pandemic) which can strand family members at international borders, highlighting vulnerabilities in personal mobility and access to family and healthcare – especially for those with unresolved citizenship and residency statuses in their country of origin
• Centralising decision-making power or placing unwavering trust in single individuals or entities that can lead to substantial losses if these trusted parties are not properly overseen and lack transparency in their investment decisions

 

Understanding the spectrum of risks

In an era of rapid geopolitical shifts and socio-economic turbulence, protecting family wealth, safety, and well-being is essential. As such, the value of a nimble approach to risk management is clear.

Of course, life is full of risk, from business ventures to financial investments, personal decisions to lifestyle activities. Eliminating risk is impossible. But understanding, assessing, and managing these risks is an essential part of wealth planning. A proactive approach not only enables families to navigate uncertainties with greater resilience. It also supports informed decision-making, helping to secure long-term objectives.

As the American philosopher Henry David Thoreau advised, we must “simplify, simplify”. In this article, we’ll cut through the clutter, and present a clear, structured framework for understanding the risks above.

We have identified three key categories of risk:

 

1. Geopolitical risks

These stem from political, social, or economic events and developments across various jurisdictions. They have the potential to affect global and regional stability (along with the wider business environment).

Today’s political landscape features risks that aren’t confined to traditionally ‘high-risk’ jurisdictions. Every country faces unique challenges, including sudden legislative changes and geopolitical events.

For entrepreneurs, geopolitical risks can directly affect the profitability and sustainability of family enterprises through economic downturns, political instability, regulatory shifts, and new compliance burdens. Such disruptions can drastically alter asset values and impose significant constraints on the movement of people, goods, wealth, and services.

As such, these risks can diminish the effectiveness of existing asset structures and reduce legal protections for family wealth. Furthermore, geopolitical decisions and international conflicts may compromise parts of family wealth, posing reputational threats and operational challenges.

How, then, can an entrepreneur mitigate these risks?

Strategies could include selecting jurisdictions with strong investment protection treaties and ‘firewall’ legislation to guard against illegitimate third-party claims. Incorporating ‘flee clauses’ in agreements provides flexibility, allowing swift jurisdictional changes to enhance the resilience of family wealth against uncertainties.

Ultimately, developing a strategy that adapts to current conditions and anticipates future scenarios is crucial for ensuring long-term stability and growth.

 

2. Asset risks

This category highlights concerns related to the lack of diversification across asset classes and jurisdictions. It also covers the risks of failing to segregate private wealth from business holdings.

Concentrating assets in a single jurisdiction not only exposes them to geopolitical risks specific to that area. It also exposes them to financial vulnerabilities unique to each asset class. This applies to financial assets, business-linked assets, real assets, and direct investments.

Without proper diversification, family wealth becomes highly susceptible to downturns that affect specific sectors or markets. Personal financial decisions or liabilities might impact business assets if they are not adequately protected. Likewise, claims against business assets or disputes with business partners could jeopardise the entire family’s financial stability.

To mitigate these risks, entrepreneurs should consider diversifying assets across different classes and jurisdictions, as well as ring-fencing them via the safest legal structuring applicable under local laws.

Establishing independent entities for various assets, managed by different representatives, provides a robust framework against a wide range of vulnerabilities. This structured approach enhances the resilience and growth of family wealth by ensuring long-term stability and reducing potential financial losses.

 

3. People risks

These risks emerge from the potential negative impacts of key individuals — both within the family and from external sources — who hold or control significant assets.

Centralising asset ownership and decision-making in the hands of a few, without sufficient oversight and contingency planning, exposes the family ecosystem to a wide range of internal and external threats.

A major area of concern is the mobility of individuals or families managing assets across multiple jurisdictions while maintaining legal and personal ties in each location.

In our experience, families often underestimate the implications such movements have on the family’s overall ecosystem. In particular, changes in residency or citizenship can significantly alter legal protections, affecting the family’s ability to securely manage, transfer, or maintain assets.

Moreover, events such as divorce, health issues, or legal challenges can destabilise the family’s relationships, assets, and governance. Personal and business-related claims, along with regulatory restrictions, not only threaten asset integrity but also risk attracting public scrutiny and legal proceedings. Families must navigate reputational risks and security threats, which often necessitates sophisticated physical and digital protection strategies.

Effective governance frameworks should adopt a ‘trust, but verify’ approach incorporating checks and balances, distributing decision-making powers, involving family members, and ensuring continuity amidst personal upheavals (The importance of checks and balances in wealth planning – Conduct). This approach is essential for managing the complexities arising from differing residencies and passports, thereby protecting individual well-being, and aligning asset protection strategies with the legal frameworks of relevant jurisdictions. Ultimately, this safeguards the family’s interests across borders.

 

A simple, practical approach to manage comprehensive diversification

Of course, identifying risks is only the first step. Actively managing them on an ongoing basis is much harder.

To accomplish this, we rely on a straightforward, effective formula. It’s based on four key questions:

 

1. What (assets)?

Identifying the specific type and nature of the assets

2. Where (location)?

Determining the geographical and jurisdictional context of assets, legal instruments, and people involved

3. How (structures)?

Understanding the legal frameworks, planning tools, and governance of the structures that hold the assets

4. Who (participants)?

Knowing and assessing the parties involved and their roles and responsibilities in holding, benefitting, advising, managing, and controlling the assets.

 

By addressing these questions, we can comprehensively assess and manage the risks associated with families, their individuals, their businesses, and wealth.

But, while a comprehensive wealth plan addresses a diverse range of risks, it is often not sufficient alone.

That’s why it’s important to consider alternative outcomes, explore various “what if” scenarios, and develop contingency strategies with a practical action plan. Dedicating attention to contingency planning and scenario analysis adds an extra layer of protection and adaptability to the overall wealth plan.

Stewards of family wealth need to understand the subtleties of geopolitical shifts, legal developments, and economic fluctuations. It’s essential to implement a strategy of diversification that extends to all facets of family life – not just to financial portfolios. The risks associated with overconcentration, flawed decision-making, and inadequate diversification are considerable. By embracing a comprehensive, systematic approach, individuals and families safeguard not only their loved ones and supported causes, but also their overall wealth and well-being. Such a strategy helps preserve meaningful relationships that sustain their goals and enrich their lives.

 

Select questions to assess your strategy for diversification and risk management

 

1. Evaluating risks
   • Have you assessed how geopolitical shifts, asset-related fluctuations (including trade restrictions, taxation, and market volatility), and personal risks might impact your wealth planning?
   • What are your top challenges, and how could these risks hinder your key planning goals?
2. Managing geographical diversification
   • How do you manage the geographical diversification of your assets to enhance your family’s mobility and freedom?
3. Utilising legal and structuring tools
   • How effectively do you use structuring tools in politically stable, legally robust jurisdictions with developed investment protection frameworks?
   • Are your strategies for asset structuring designed to separate business and private assets from family interests, ensuring sufficient ring-fencing and detachment?
   • How do you leverage legal planning tools and potential exit strategies?
4. Building relationships and governance
   • Which relationships are essential for navigating your wealth and wealth plan, within your family and among advisors?
   • How do you maintain effective oversight and protect these connections from risks?
5. Planning for uncertainties
   • What are your top three ‘what if’ scenarios?
   • Who are the key individuals involved in strategising and responding to these challenges?
6. Engaging your imagination
   • If you could choose a movie character to help navigate your wealth planning challenges, who would it be and why?
   • Select someone who embodies the necessary skills or attitude to manage the challenges you’ve identified