Family Office

Family Offices Should Behave As Regulated Entities

Marie Gervacio 28 July 2021


This article explores the various risks involved from the family office perspective, including under-reported fraud, as their risk management framework can lag those of regulated peers, so the writer says. It also calls out questions which family offices should ask themselves as they seek to de-risk their models.

The family offices industry, particularly in the US, was taken aback earlier this year when regulators suggested that this sector should fall under more of a regulatory umbrella following the case of Archegos Capital. The New York-based hedge fund, structured as a family office, collapsed amid wrong-way bets, and its failure hit various banks, notably Credit Suisse and Nomura. Responding to calls for more controls, some in the US wealth industry have argued that these demands are misguided and will miss their targets. Others have said that Archegos fell between the definition of a family office or hedge fund.

There is no doubt that the family offices industry cannot assume that calls for controls will go away. And to consider the issues further is Marie Gervacio, who is senior managing director, risk, forensics and compliance at Ankura Hong Kong. Ankura offers consultancy, advisory, and investment banking services, among its offerings. 

The editors of this news service are pleased to share these comments and invite responses. The editors don’t necessarily endorse all views of guest contributors and invite responses. Email and

The recent collapse of Archegos Capital Management, Bill Hwang’s family office (1) - from which losses exceeded $9 billion across only three banks - suggests that the banks who serve family offices need to employ stronger due diligence and risk monitoring on these largely unregulated entities. Family offices themselves need to urgently assess the adequacy of their governance and risk frameworks, as well as the skillsets and experience of those charged with running the business.   

While a few banks got out relatively early, Credit Suisse and Nomura bore the brunt of the losses at $5 billion and $3 billion respectively, with the Swiss bank taking what its executives called an “unacceptable” first-quarter loss that wiped out what would have been its best quarterly performance in a decade. The crisis also led to top bonus cuts, the ousting of key executives, and a regulatory investigation (Financial Times 2021) (2).

It is another event on the ever-expanding list of harrowing reminders that unregulated corners of the market can have material repercussions on the financial system and its participants, with this particular corner representing an estimated $7 trillion assets under management (AUM), compared with $3.4 trillion AUM in global hedge funds. 

Most multinational banks are no strangers to the complex mechanisms and regulatory requirements that drrive ongoing risk monitoring (which can still fail them), so any new governance and controls enhancements that this latest event may hasten, will rise on the priority list, but still be of no surprise to those institutions. In the case of family offices, however, the vast spectrum of scale and maturity within the sector, coupled with little to no regulation, means that their governance and risk management frameworks could be largely informal and inconsistent and, in many cases, ineffective.

The market agrees that Mr Hwang was a “bad apple (3, 4, 5)”, and in general, the market may also agree that most family offices are not out to get away with nefarious activities in the absence of regulatory oversight. Archegos has brightened the spotlight on whether it is finally time to regulate family offices, but perhaps a more urgent, practical question might be: How best can family offices improve their risk management capabilities and maturity whether they are regulated or not?

Risk management frameworks lags those of regulated peers
In our experience advising private equity participants and family offices, there are often significant blind spots around risk management.  Historical informality and insular management practices have meant that many family offices lack the institutionalised frameworks, technology, and specialised skillsets that enable more dynamic risk identification and management. 

Given the scale of wealth involved, it seems incredible that family offices do not take advantage of proven governance and risk management frameworks, bolstered by effective internal controls, to address the spectrum of organisational and operational risks.

The upside is massive. Family offices with effective risk management programmes are in a better position than their peers to identify potential risk areas before they blow out into crises that lead to margin call failures, operational losses and, in some cases, fraud.  

When we conduct risk assessments in family offices and offer best-practices recommendations, our clients usually find that their new or enhanced internal controls become critical levers to help protect family wealth. A culture of strong governance boosts internal and external confidence in the overall operations of the family office and improves the accuracy of the operational and financial information used to make strategic decisions, transact with counterparties, and enhance transparency with deal partners.

Family office fraud – more common than you think
While overarching improvements in governance and risk management should be the priority for family offices, fraud risk management deserves particular focus. Family office fraud largely flies under the media radar, but it happens more often than banks and family office owners themselves appreciate. It can be a recipe for disaster to rely primarily on loyalty and family ties when it comes to significant control over an ultra-high net worth family’s finances and investments. Loyalty only goes so far before temptation takes over, especially if an individual within the family comes under financial pressure beyond the purview of the family office.

Yet, family offices often take a “lite” approach to corruption and fraud risk management. It is a common mistake to assume that just because an entity is not subject to certain regulations, the risk of fraud is low. On the contrary, given that family offices are less likely to monitor fraud on a targeted basis than regulated entities, they are exposed to more blind spots than their regulated counterparts who themselves still struggle with preventing and detecting fraud.

To supplement enhanced governance and risk management frameworks, family offices need more formal, sophisticated fraud prevention programmes, with robust policies and procedures, and periodic fraud risk assessments - programmes that can proactively prevent and detect fraud early, mitigating both reputational and monetary losses for the family office and their counterparties. 

Culturally, this can be an issue. The starting point for combatting fraud is admitting that there might be a problem. Family offices must have the pragmatism to acknowledge fraud risk and be willing to train family members and family office employees alike about how to identify and respond to fraudulent behaviours. 

What questions should family offices be asking?
Family offices that have not recently reviewed their governance and risk management frameworks need to ask themselves:
-- At what point would our current governance mechanisms and risk systems signal any red flags related to an Archegos-type event - and perhaps, more importantly, would those indicators be used as a basis to challenge the head of the family office from within? 
-- Do our systems and culture adequately defend against fraud risk?
-- Are we scanning the horizon for new risks and updating our internal controls accordingly?
-- When potential issues arise, are we able to respond appropriately to mitigate and minimise loss?

The future of the family office, particularly in the absence of regulatory supervision, is the integration of strategic wealth preservation and growth with strong governance and risk management. By harnessing regulated-entity practices, family offices can have all the benefits of rigorous risk management and fraud detection without the onerous imposition of regulatory compliance, effectively getting the best of both worlds.


1,  A family office is a private office for a family.  While the definitions of family differ across jurisdictions, family members are generally defined as the lineal descendants of common ancestors, spouses of the descendants as well as stepchildren and adopted children. With the expansion of the family tree, the structure of a family can become quite complex, and this complexity will also often be reflected in the structure of the family office.





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